ABC Method
Activity-based costing (ABC) is a costing methodology that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each. This model assigns more indirect costs (overhead) into direct costs compared to conventional costing.
Aims of model
With ABC, a company can soundly estimate the cost elements of entire products ACTIVITIES and services. That may help inform a company's decision to either:
Identify and eliminate those products and services that are unprofitable and lower the prices of those that are overpriced (product and service portfolio aim)
Or identify and eliminate production or service processes that are ineffective and allocate processing concepts that lead to the very same product at a better yield (process re-engineering aim).
In a business organization, the ABC methodology assigns an organization's resource costs through activities to the products and services provided to its customers. ABC is generally used as a tool for understanding product and customer cost and profitability based on the production or performing processes. As such, ABC has predominantly been used to support strategic decisions such as pricing, outsourcing, identification and measurement of process improvement initiatives.
So what is really the difference between ABC and traditional cost accounting methods? Despite the enormous difference in performance, there is three major differences:
1. In traditional cost accounting it is assumed that cost objects consume resources whereas in ABC it is assumed that cost objects consume activities.
2. Traditional cost accounting mostly utilizes volume related allocation bases while ABC uses drivers at various levels.
3. Traditional cost accounting is structure-oriented whereas ABC is process-oriented.
Step 1. Cost allocation resources
In order to calculate the cost of resources , it is recommended first to determine the structure of
Aims of model
With ABC, a company can soundly estimate the cost elements of entire products ACTIVITIES and services. That may help inform a company's decision to either:
Identify and eliminate those products and services that are unprofitable and lower the prices of those that are overpriced (product and service portfolio aim)
Or identify and eliminate production or service processes that are ineffective and allocate processing concepts that lead to the very same product at a better yield (process re-engineering aim).
In a business organization, the ABC methodology assigns an organization's resource costs through activities to the products and services provided to its customers. ABC is generally used as a tool for understanding product and customer cost and profitability based on the production or performing processes. As such, ABC has predominantly been used to support strategic decisions such as pricing, outsourcing, identification and measurement of process improvement initiatives.
So what is really the difference between ABC and traditional cost accounting methods? Despite the enormous difference in performance, there is three major differences:
1. In traditional cost accounting it is assumed that cost objects consume resources whereas in ABC it is assumed that cost objects consume activities.
2. Traditional cost accounting mostly utilizes volume related allocation bases while ABC uses drivers at various levels.
3. Traditional cost accounting is structure-oriented whereas ABC is process-oriented.
Step 1. Cost allocation resources
In order to calculate the cost of resources , it is recommended first to determine the structure of