What is Activity-based costing?
Activity Based Costing (ABC) is a method for properly allocating costs in activities within an organization.
Unlike traditional costing methods, it allocates costs according to the actual use of services and products rather than arbitrarily.
Overview and Benefits
ABC helps organizations accurately identify the actual costs of an activity, and clarify profitability and resource usage.
This is important for making decisions regarding pricing, budgeting, and operational improvements.
For example, by identifying unprofitable products and services that are likely to be a drain on resources, companies can adjust or eliminate them.
Methodology
The methodology behind ABC is to identify key activities within an organization and assign costs to each product or service according to its utilization of these activities.
This requires understanding a company’s processes and analyzing various factors such as work hours and machine usage.
Strategic Application
On the strategic side, ABC is used to make decisions regarding product design, pricing strategies, and customer revenues.
ABC facilitates streamlining operations and improving efficiency by identifying activities that do not add significant value.
Challenges
Despite its many benefits, implementing ABC requires significant data collection and analysis and management commitment.
It will also require a change in the way traditional financial information is handled, requiring more detailed data and a cultural change in cost management.
Conclusion
In summary, activity-based costing is a method for enhancing corporate cost management and strategic decision making.
It provides an important perspective on the movement of money, although there are various challenges to implementation.
This article uses material from the Wikipedia article “Activity-based costing” which is released under the Creative Commons Attribution-Share-Alike License 4.0. Additionally, the texts and images were generated using ChatGPT.