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.