Definition
Activity-Based Costing (ABC) is a method of allocating costs to
products and services. It is generally used as a tool for planning and
control. It was developed as an approach to address problems associated
with traditional cost management systems, that tend to have the
inability to accurately determine actual production and service costs,
or provide useful information for operating decisions. With these
defiencies managers can be exposed to making decisions based on
inaccurate data. The higher exposure is for companies with multiple
products or services.
ABC allows managers to attribute costs to activities and products more
accurately than traditional cost accounting methods. The activities
responsible for the costs can be identified and passed on to users only
when the product or service uses the activity. Some of the advantages
ABC offers is an improved means of identifying high overhead costs per
unit and finding ways to reduce the costs.
The way it works is first major activities are identified in the
process system. Next cost pools are created for groups of activities
that can be allocated together. Following this cost drivers are
identified. The number of cost drivers used vary depending on the
balance between accuracy and complexity. After determining the cost
drivers, rates are calculated. The rates are then applied to the
respective cost drivers for each product or service that is being
considered. The overhead cost per unit is then derived by dividing the
total cost for the product by the total product units.
The Issues
One
of the basic issues surrounding ABC is the difficulty of
implementation. Identifying activities or processes to be allocated
properly is cumbersome and takes a lot of effort. It requires that
processes are adequately mapped throughout the organization. For a
company that has undertaken a quality effort, or an effort to
reengineer business processes, a major part of the work may already be
completed. But for those who have not it is likely to be a major
undertaking.
Just as anything else, Activity-Based Costing is no panacea, nor should
it be embraced as a religion, or a fad. It is an operational strategy
that needs to be carefully reviewed for applicability. The best way to
approach the situation is to first rationalize a facility and its
processes, identify the opportunities, and then conceptualize a
solution. If this fits, use it.
Pragmatic Applications
Activity-Based Costing makes a lot of sense for companies with multiple products or services who are suffering from inaccurate costing information and need to know which products are really winners and which are losers. For these companies the effort required to successfully implement ABC is worth the time and resources. ABC can identify high overhead costs per unit and find ways to reduce the costs, avoid decreases in head counts due to inaccurate allocation of costs, and measure profitability with higher accuracy than traditional costing that uses direct-labor hours as the only cost driver.
Our Approach: Tools from a Toolchest
Rockford
Consulting Group applies concepts and technologies as the situation
warrants, that will result in the ultimate benefit to our clients. We
treat strategies, technologies, and methodologies as tools in a
toolchest, and use them when they offer practical solutions and
achievable results. We believe that each client situation is unique,
with its own unique set of solutions.
Why Us?
Rockford Consulting Group, Ltd. can provide long-term assistance to many companies in a variety of industries. The firm has a cadre of the best management consultants in the world today, providing high quality professionalism through the use of experience and innovation. (Please see our consulting services Consulting Services )
We subscribe to the Institute of Management Consultants Code of Professional Conduct. All consultants engaged on projects adhere to its principles. Whenever possible we will use consultants certified in their particular specialty area. Certification assures that consultants have substantial prior experience in their specialty, and their competencies have been tested by the IMC, and verified by a number of clients. This assures our clients that we are assigning the highest qualified consultants in the profession.
We provide technical expertise, team facilitation, leadership, and direction in deciding how you will meet the challenge. We refer you to our Qualification Statement for further details on our background, areas of specialization, concepts and technologies applied, staffing, operating policy, approach, companies and industries served, case studies and references. Equally as important, we train our clients to sustain new methods of manufacturing and the consequential benefits over time. Your company will benefit directly from this training.
We have achieved an efficiency in our approach to assignments that allows us to provide high quality technical and managerial advice in a much shorter amount of time than could be accomplished years ago. We are able to do this because of the extensive consulting experience that each of our specialists has.
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