Activity Based Costing (ABC)

Knowledge Center





Summary, forum, best practices, expert tips and information sources.


Activity Based Costing (ABC) is an alternative to the traditional way of accounting. Traditionally it is assumed that high volume customers are profitable customers. A loyal customer is also a profitable customer. And profits will follow a happy customer. Studies about customer profitability have unveiled that the above ideas are not necessarily true. ABC is a costing model that identifies the cost pools, or activity centers, in an organization. It assigns costs to products and services (cost drivers), based on the number of events or transactions that are taking place in the process of providing a product or service. As a result, Activity Based Management can support managers to see how shareholder value can be maximized and how corporate performance can be improved.


Historically, cost accounting models related indirect costs on the basis of volume.


Typical benefits of Activity-Based Costing:

  • Identify the most profitable customers, products and channels.
  • Identify the least profitable customers, products and channels.
  • Determine the true contributors to- and detractors from- financial performance.
  • Accurately predict costs, profits and resources requirements associated with changes in production volumes, organizational structure and costs of resources.
  • Easily identify the root causes of poor financial performance.
  • Track costs of activities and work processes.
  • Equip managers with cost intelligence to stimulate improvements.
  • Facilitate a better Marketing Mix
  • Enhance the bargaining power with the customer.
  • Achieve better Positioning of products

With the costing now based on activities, the cost of serving a customer can be ascertained individually. Deducting the product cost and the cost to serve each customer, one can arrive at customer's profitability. This method of dealing separately with the customer costs and the product costs, enables the identification of the profitability of each customer. And Positioning the products and services accordingly.


Activity Based Costing - OverviewContinuous Improvement

The implementation of ABC can make the employees understand the various costs involved. This will then enable them to analyze the cost, and to identify the activities that add value and those that do not add value. Finally, based on this, improvements can be implemented and the benefits can be realized. This is a continuous improvement process in terms of analyzing the cost, to reduce or eliminate the non value added activities and to achieve an overall efficiency.


ABC has helped enterprises in answering the market need for better quality products at competitive prices. Analyzing the product profitability and customer profitability, the ABC method has contributed effectively for the top management's decision making process. With ABC, enterprises are able to improve their efficiency and reduce the cost without sacrificing the value for the customer. Many companies also use ABC as a basis for a balanced scorecard.


This has also enabled enterprises to model the impact of cost reduction and subsequently confirm the savings achieved. Overall, Activity Based Costing (ABC) is a dynamic method for continuous improvement. With Activity Based Costing any enterprise can have a built-in competitive cost advantage, so it can continuously add value to both its stakeholders and customers.


The implementation of Activity Based Costing is not easy - not an ABC. Special activity based costing software can be helpful.


Time-Driven Activity-Based Costing

Robert Kaplan and Steven Anderson have suggested Time-Driven Activity-Based Costing. This is a new approach to avoid the difficulties associated with large-scale ABC implementation (HBR November 2004). In this revised model, managers estimate the resource demands of each transaction, product, or customer, rather than relying on time-consuming and costly employee surveys. The Time-Driven Activity-Based Costing method is simpler since it requires, for each group of resources, estimates of only two parameters. 1. What are the costs per time unit of capacity to supply resources to the business activities? (The total overhead expenditure of a department divided by the total employee time available). 2. An estimation of the unit times of activities: how much time it takes to carry out one unit of each kind of activity (as estimated or observed by the manager). This Time-Driven ABC approach also overcomes a serious technical problem associated with employee surveys: employees invariably report percentages that add up to 100, when they are asked to estimate time spent on activities. Managers should take into account time that is idle or unused. The method also supports time equations, a feature that enables the ABC model to approximate the complexity of real-world operations. By showing how specific order, customer, and activity characteristics cause variation in processing times.


Activity Based Costing Special Interest Group


Special Interest Group (707 members)

Forum about Activity Based Costing  

The most recent topics about: Activity Based Costing.


🔥 NEW What is Process Costing?
In cost accounting systems, what is process costing? (...)
4
 
1 reactions
 
What is Job Order Costing?
In cost accounting systems, what is job order costing? (...)
3
 
1 reactions
 
How to Derive Overhead Cost from a P&L?
Hello reader, I'm trying to decompose the overhead of a company through its Profit and Loss account. I have calculated f (...)
2
 
0 reactions
 
Best Practices about Activity Based Costing

Here you will find the most valuable ideas and practical suggestions.


🥇 Limitations and Advantages of ABC for Budgeting
What are the limitations and advantages of ABC in the context of preparing plans and budgets? (...)
156
 
3 reactions

 
🥈 Limitations ABC monitoring operations
What are the limitations with regard to monitoring and controlling operations? (...)
89
 
1 reactions

 
🥉 ABC in an Advertising Firm?
How can ABC be applied in an advertising firm where activities vary per project, depending on the client, its marketing (...)
39
 
4 reactions

 
The Cost of Non-value-added Activities
Why do non-value activities cause costs to increase unnecessarily? (...)
33
 
3 reactions

 
ABC: reduce non value adding activities?
How far do you agree that Activity Based Costing gives opportunities to reduce or eliminate activities that do not add v (...)
27
 
2 reactions

 
Consequences of ABC Analysis
If Activity-based Costing has been correctly implemented, and it turns out a product is causing losses, does this mean a (...)
26
 
4 reactions

 
Capacity Minutes and Industry Norms
Productivity levels in minutes - productive time Work days are about 480 minutes (8 x 60). Where could I find what the (...)
24
 
4 reactions

 
Drivers still Right?
ABC is one of the most recent developed evolutions in costing. It has a big impact in allocating the cost to the right o (...)
22
 
3 reactions

 
ABC Helps Companies Survive Recession
Companies using ABC costing have a better chance of surviving the recession than companies using traditional methods. Pl (...)
21
 
1 reactions

 
Traditional Costing versus Activity Based Costing
When should I choose the traditional costing instead of ABC? Compared with traditional costing, what are the drawbacks (...)
20
 
4 reactions

 
Conditional Resources in ABC
How does ABC cater for estimating the cost of business processes which may take many different routes depending on the o (...)
18
 
1 reactions

 
The Process of Activity Based Costing (ABC) simplified
While doing ABC the only thing to be kept in mind is the activity and the cost associated with it. For example : A busi (...)
18
 
1 reactions

 
Activity Based Costing (ABC)
Company's who use ABC method have a more chance in surviving under recession rather than company's who use Traditional B (...)
17
 
2 reactions

 
Overhead Costing - Food Manufacturing
The company I work for manufactures food. The company is small. How much overhead should I count into my costing? I do (...)
16
 
2 reactions

 
ABC in service companies such as airlines?
ABC may be appropriate in the manufacturng company, but I doubt applying in service givng companies is worth while. Espe (...)
14
 
2 reactions

 
Degree of Detail in ABC
When planning to build an ABC model it is essential to first make the decision what level of detail ABC is to be capture (...)
12
 
2 reactions

 
Activity Based Costing Implementation
How can a company implement activity based costing? (...)
10
 
2 reactions

 
ABC and Decision making
Are managers able to make better decisions through the analysis of indirect cost allocation? (...)
9
 
2 reactions

 
Time-driven ABC (TDABC)
Is anyone using TDABC as a substitute for traditional activity-based costing? I would love to discuss how it's working, (...)
8
 
1 reactions

 
Calculating the Most Profitable Way of Manufacturing a Product
Dear all, I am struggling with the start of a project in which I need to figure out what way of supplying a customer wit (...)
7
 
3 reactions

 
Activity Based Management (ABM)
What is the modern term or second name for Activity Based Costing? (...)
7
 
1 reactions

 
Recommended ABC Software
Which software package would you recommend I use in our small business to enable me to setup an ABC-system? (...)
6
 
8 reactions

 
ABC or TOC? The Differences between Activity Based Costing and the Theory of Constraints
In past literature, the Theory of Constraints (TOC) has been seen as more or less contradicting the concept of ABC-costi (...)
6
 
0 reactions

 
Comparison Activity Based Costing, Time-Driven-ABC and Lean Accounting
In the article "Activity Based Costing, Time-Driven Activity Based Costing and Lean Accounting: Differences Among Thr (...)
5
 
0 reactions

 
Over Recovery / Under Recovery Level
I want to know: Do you calculate an over/under recovery for each activity or do you calculate one singe over/under recov (...)
4
 
1 reactions

 
ABC Costing in Make to Order of Repetive Manufacturing
I think ABC costing works better only in repetitive manufacturing type of industry, where the amount of production in a (...)
4
 
1 reactions

 
Organizational Issues when Introducing ABC
What kind of organizational / behavioral problems can we expect to arise when ABC is being introduced in a firm? (...)
3
 
0 reactions

 
ABC in the Federal Environment
Does anybody have experience implementing ABC in the federal environment? There are obviously a lot of differences, but (...)
3
 
1 reactions

 
An ABC Initiative is Only as Effective as the Software That Supports It
For any change initiative or performance improvement initiative that is taken in an organization, it is always important (...)
3
 
0 reactions

 
Expert Tips about Activity Based Costing

Here you will find professional advices by experts.


4 Steps to Assign Resources to End Products

ABC Implementation (...)
   
 
 
 

Disadvantages of ABC

Cost Mgt, Decision-making (...)
   
 
 
 

Applicability in Hotel Bussiness

Cost Management, Decision-making (...)
   
 
 
 

Application Challenges of ABC

Cost Mgt, Decision-making (...)
   
 
 
 
Information Sources about Activity Based Costing

Here you will find powerpoints, videos, news, etc. to use in your own lectures and workshops.


Time-Driven ABC

Activity Based Costing (...)
 
 
 
 

Activity Based Costing and Activity Based Management

Accounting, Costing Systems (...)
 
 
 
 

Costing Strategies

Multinational Companies (...)
 
 
 
 

Product Costing, Process Costing and Job-Order Costing

Cost Management, Management Accounting, Managerial Accounting, Activity Based Costing (...)
 
 
 
 

Interview with Kaplan: ABC in the Public Sector

Understanding that Activity Based Costing can be applied to the public sector (...)
 
 
 
 

ABC Diagram

Activity Based Costing (...)
 
 
 
 

Compare with ABC: Enterprise Architecture  |  Total Cost of Ownership  |  Balanced Scorecard  |  Kaizen  |  Marketing Mix  |  Business Intelligence  |  Performance Management  |  CSFs and KPIs  |  Beyond Budgeting


Return to Management Hub: Decision-making & Valuation  |  Finance & Investing  |  Marketing  |  Supply Chain & Quality


More Management Methods, Models and Theory

Special Interest Group Leader

Are you an expert in Activity Based Costing? Sign up for free

Link to this knowledge center

Copy this code to your web site:

 
 


About 12manage | Advertising | Link to us / Cite us | Privacy | Suggestions | Terms of Service
© 2020 12manage - The Executive Fast Track. V15.6 - Last updated: 20-10-2020. All names ™ of their owners.