Activity-based Costing - Application in Routine Business

Application in Routine Business

ABC has proven its applicability beyond academic discussion. ABC is applicable throughout company financing, costing and accounting:

  • ABC is a modeling process applicable for full scope as well as for partial views.
  • ABC helps to identify inefficient products, departments and activities.
  • ABC helps to allocate more resources on profitable products, departments and activities.
  • ABC helps to control the costs at any per-product-level level and on a departmental level.
  • ABC helps to find unnecessary costs that may be eliminated.
  • ABC helps fixing the price of a product or service with any desired analytical resolution.

A reports summarizes reasons for implementing ABC as mere unspecific and mainly for case study purposes (in alphabetical order):

  • Better Management
  • Budgeting, performance measurement
  • Calculating costs more accurately
  • Ensuring product /customer profitability
  • Evaluating and justifying investments in new technologies
  • Improving product quality via better product and process design
  • Increasing competitiveness or coping with more competition
  • Management
  • Managing costs
  • Providing behavioral incentives by creating cost consciousness among employees
  • Responding to an increase in overheads
  • Responding to increased pressure from regulators
  • Supporting other management innovations such as TQM and JIT systems

Beyond such selective application of the concept, ABC may be extended to accounting, hence proliferating a full scope of cost generation in departments or along product manufacturing. Such extension, however requires a degree of automatic data capture that prevents from cost increase in administering costs.


Steps to implement Activity-Based costing

  1. Identify and assess ABC needs - Determine viability of ABC method within an organization.
  2. Training requirements - Basic training for all employees and workshop sessions for senior managers.
  3. Define the project scope - Evaluate mission and objectives for the project.
  4. Identify activities and drivers - Determine what drives what activity.
  5. Create a cost and operational flow diagram – How resources and activities are related to products and services.
  6. Collect data – Collecting data where the diagram shows operational relationship.
  7. Build a software model, validate and reconcile.
  8. Interpret results and prepare management reports.
  9. Integrate data collection and reporting.

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