ACTIVITY BASED COSTING

In a manufacturing environment where a large number of similar items are produced, it makes sense to study the different activities that are brought together in the manufacturing process. By knowing how material, labour and overhead costs are put to use, managers get a better idea of what price to offer that product or products.

 

The success of ABC costing is the ability to identify strategies that help the company improve its product design by eliminating activities that are non-productive or non-economical. The second goal to keep in mind is how to exceed customer´s expectations profitably.

 

These basic steps are involved:

 

  1. Information gathering on costs and typical reports of each department as they contribute to the final product
  2. Describe the major processes within each department
  3. Identify all inputs and outputs that relate to processes working to create a final product
  4. Identify all activities involved for each process and document these activities in detail. List out the tasks.
  5. Identify what resources are being used (people, machinery, supplies, space, etc.,)
  6. Define an output measure (eg. Financial / non-Financial)
  7. Define the performance measure for each major activity (eg. quality, time or cost)
  8. Evaluate the processes and brainstorm improvements

 

By fully understanding the processes involved, managers are able to create a message that process knowledge is important and continuous improvement is expected.

ABC Costing.xlsx
Microsoft Excel Tabelle 20.4 KB