Activity Based Costing
- Activity-Based Costing (ABC) has been developed to overcome traditional costing
limitations. It increases the accuracy of product costing by using multiple cost pools to
develop multiple application rates.
- Establishes relationships between overhead costs and activities so that the overhead
costs can be more precisely allocated to products, services, or customer segments.
- Products are charged for costs of capacity they use- not for costs of capacity they don’t
use. Unused capacity costs are treated as period expenses.
- Consequence for activity-based is surcharge (i.e. Shipping)
- There is no real solution for ABC, just opportunities to approach a solution
o Ex. Cost: Materials purchasing… Cost driver: Number of purchased orders
Activity Based Management (ABM)
- Activity- based management is a method of identifying and evaluating activities that a
business performs using activity-based costing to carry out a value chain analysis or a
re-engineering initiative to improve strategic and operational decisions in an
- ABM helps identify non-value added activities in any process
- It focuses on how work is done, not what is produced
- It identifies and documents activities performed by organizations
- Activity is the object of interest where ABC is concerned with secondary cost objects
such as products or customers
Strategic Implications of Activity-Based Information
- Quality: Work performance by employees constitutes an organization’s activities
- Cost: activities use resource (labor, tech., equipment, materials, supplies, utilities)
- Time: the way activities are performed and resources dedicated to them.
- Globalisation and Competitiveness
o Increased global pressures force organizations to pay more attention to the
interrelationships among processes and resources consumed