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    ABC Costing

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    yunie1001
    Activity-based costing (ABC) is an alternative accounting method that assigns costs to products and services based on the activities and resources required to produce them. Traditional costing methods often incorrectly assume high volume customers are profitable. ABC identifies cost pools and assigns costs based on cost drivers like transactions. This provides more accurate profitability analysis of customers, products, and channels. ABC also supports continuous improvement by helping managers identify value-adding and non-value adding activities to improve efficiency. Time-driven activity-based costing is a simplified approach that estimates resource demands rather than relying on employee surveys.

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    ABC Costing

    Uploaded by

    yunie1001
    7 views3 pages
    Activity-based costing (ABC) is an alternative accounting method that assigns costs to products and services based on the activities and resources required to produce them. Traditional costing methods often incorrectly assume high volume customers are profitable. ABC identifies cost pools and assigns costs based on cost drivers like transactions. This provides more accurate profitability analysis of customers, products, and channels. ABC also supports continuous improvement by helping managers identify value-adding and non-value adding activities to improve efficiency. Time-driven activity-based costing is a simplified approach that estimates resource demands rather than relying on employee surveys.

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    Activity-based costing (ABC) is an alternative accounting method that assigns costs to products and services based on the activities and resources required to produce them. Traditional costing methods often incorrectly assume high volume customers are profitable. ABC identifies cost pools and assigns costs based on cost drivers like transactions. This provides more accurate profitability analysis of customers, products, and channels. ABC also supports continuous improvement by helping managers identify value-adding and non-value adding activities to improve efficiency. Time-driven activity-based costing is a simplified approach that estimates resource demands rather than relying on employee surveys.

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    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    7 views3 pages

    ABC Costing

    Uploaded by

    yunie1001
    Activity-based costing (ABC) is an alternative accounting method that assigns costs to products and services based on the activities and resources required to produce them. Traditional costing methods often incorrectly assume high volume customers are profitable. ABC identifies cost pools and assigns costs based on cost drivers like transactions. This provides more accurate profitability analysis of customers, products, and channels. ABC also supports continuous improvement by helping managers identify value-adding and non-value adding activities to improve efficiency. Time-driven activity-based costing is a simplified approach that estimates resource demands rather than relying on employee surveys.

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    © All Rights Reserved
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    Download as doc, pdf, or txt
    of 3

    Activity Based Costing (ABC)

    Analyzing product and customer profitability.


    Explanation of Activity Based Costing.
    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.
    Continuous 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.

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