Activity-based costing ABC

Key issues What are the shortcomings of traditional cost accounting from a logistics point of view How can costs be allocated to processes so that better decisions can be made  

ABC recognises that overhead costs do not just happen, but are caused by activities, such as holding products in store. ABC therefore seeks to break the business down into major processes - such as manufacture, storage and distribution - and then break each process into activities. For example, the distribution process would include such activities as picking, loading, transport and delivery. For each of these activities, there must be one cost driver what is it that drives cost for that activity For example, the cost driver for the storage activity may be the volume of a case, whereas the transport activity may be driven by weight. Once we know the cost driver, we need to know how many units of that cost driver are incurred for that activity, and the cost per unit for the cost driver. 

For example, the cost driver for the transportation activity may be the number of kilometres driven, and the cost per kilometre would be the cost per unit of the cost driver. This yields the cost of the activity and, when summed across all of the activities in a process, the total cost of that process. 

ABC is difficult to implement because we need first to understand what the discrete processes are in a business where the existing links between functions are not well imderstood. There is then the issue of identifying the cost driver, which requires a fresh way of looking at each activity. For example, the cost driver for a warehouse fork-lift operator would be the number of pallets moved. The cost driver for stocking shelves would be the number of pieces that must be stacked in a given time period. A further problem occurs if there is more than one cost driver for a given activity. You are then faced with the same problem as with overhead allocation on what basis should the cost drivers be weighted Usually, this problem shows that activities have not been broken down into sufficient detail, and that more analysis is needed. ABC can therefore become complex to implement. 

The procedure of determining cost drivers is often considered to be more valuable than the ABC system itself. Activity-based management enables the cost structure of a business to be examined in a new light, allowing anomalies to be resolved and sources of waste highlighted. It may also help in better targeting 

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Activity-Based Costing (ABC) Activity-Based Budgeting (ABB)... 

For these reasons, Activity-Based Costing (ABC), the most accurate method of cost analysis, is particularly helpful in identifying all of the individual costs of an operating practice or an event, such as a chemical spill. In analyzing a spill, for example, the audit team can attach a dollar value to waste of materials and labor, system changes, unused capacity, and the spill s myriad overhead costs, as well as corporate legal, PR, and other administrative support costs, all of which need to be carefully understood in considering process improvements. 

Cost allocation learning and, 1405 time/job determination for, 1392 Cost-benefit analysis activity-based costing (ABC) for, 1704 IS systems, 98-99... 

Activity-based Costing (ABC) Due to the inability of traditional cost accounting to capture the actual cost of the process, new methods were sought capable of considering lower level... 

Second order reinforcing activities. This type of fit is between activities where one activity supports another. For example, Activity Costing also reinforces another activity, Service-Based Pricing. Activity costs provide the data to set service-related prices. (The term activity in this case is also used in Activity-Based Costing, ABC. This is a separate use of the term from its application in Activity Systems.) Changing the way scheduling is done (Varied... 

To enable the reader to better understand the format of each Process Subcategory, Table 23.3 provides additional detail on Process Attributes in the Process Subcategory, 4.7 Managing Client/Customer Partnerships. This Subcategory of DELIVER has 11 attributes that the table summarizes to help the reader evaluate the tool. This particular example calls for practices described elsewhere in this book, such as customer segmentation and activity-based costing (ABC). A user who meets the suggested minimum process standard would rank a 3 on the evaluation scale a process that uses the typical best practice would rate a 5. ... 

Activity-based costing (ABC) analysis is an adaptation of Pareto analysis. Wilfredo Pareto was a 19th century economist who determined that 80 per cent of the wealth was held by 20 per cent of the population. This axiom can be adapted to most circumstances, for example 80 per cent of car accidents are caused by 20 per cent of the drivers (young men between the ages of 17 and 25). 

Thus, it is useful to carry out an activity-based costing (ABC) analysis (Pareto chart) to identify the top customers as shown in Figure 9.4. The Pareto theory is that 20 per cent of the customers wiU account for roughly 80 per cent of the business. ABC analysis takes this a step further by dividing customers into three groupings as shown Figure 9.4. Normally the division will be the top 5 per cent, the next 15 per cent and the balance of customers 80 per cent. 

Mentioned costs of design, construction and disposal are relatively easy to define, however costs related to the usage phase is much more complicated. To describe all cash flows occurring in that phase Activity Based Costing (ABC) was applied (Sierpinska Niedbala 2003). This method assigns indirect overhead costs and activity costs to the objects, facilities, systems devices, and uses cause—effect relations between factors that generate costs and activities. In other words the ABC concept allows the grouping of the costs by actions i.e. causes of cost. 

Activity-based costing (ABC) a process-based alternative to allocating overheads. 

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