ABC is an
accounting system that attaches costs to
services and
products
based on the
resources consumed in providing them.
Costs of
activities are
traceable to the product or service for which they are
performed.
Overhead costs
are traced to a particular product or service rather than spread
arbitrarily.
True cost can be determined more accurately than was previously available with
traditional accounting. An ABC system alolows
effective measurement of how resources
are being used and how all activities
contribute to the cost of a product or
service.
Information from a given ABC system can be used to determine a competitive
price for a product or service, develop budgets, future cost estimates and measuring
performance. But ABC is more than a superior accounting system. It allows management
to understand what triggers costs and how to manage them. Unlike traditional
accounting systems, ABC is a cost management system that provides a matrix to
accurately quantify consumed resources triggered by activities and activities
triggered by processes. A company thus has clear insight into the efficiency with
which it converts resources into value.
Having costs broken out to a detailed level allows cost drivers to stand out.
This visibility enables a company to identify activities with disproportionately
large cost and little value added so these activities can be eliminated or reduced.
ABC can help employees make cost conscious decisions at all levels of the company
and promotes proactive cost reduction rather than reactive performance problem
investigation. When ABC is used as a management system, it is a powerful tool
for rethinking and improving product or service s, services, processes and market
strategies. For example, when overhead costs are allocated directly to product
or service s, managers often find that a particular product or service is not
profitable which may lead to a change in business strategy. ABC provides the
means to allow a company to decide if resource consumption for a particular
product or service is consistent with its business objectives.
Sources:
1. Burk, Karen B., Webster, Douglas W., Activity Based Costing
& Performance, (Fairfax, VA, American Management Systems, Inc. 1994)
2. Dekker, Ltd., Dekker Trakker Activity Based Cost Management System,
1994
3. Ness, Joseph A., Cucuzza, Thomas G., "Tapping the Full Potential
of ABC", Harvard Business Review, July-August 1995.
4. O'Guin, Michael C., The Complete Guide to Activity Based Costing,
(Englewwod Cliffs, NJ, Prentice Hall, 1991)