Time Driven Activity Based Costing
National Graduate School of Quality Management
Robert Kaplan introduced Activity Based Costing (ABC) in the late 1980s. It can be considered as the modern alternative to absorption costing, and allowing managers to better understand product and customer net profitability. Kaplan view is that the ABC target state will provide organization leadership with better information to make value-based decisions.
Over the past 15 years, activity-based costing has enabled managers to see that not all ...view middle of the document...
ABC focuses attention on cost drivers, the activities that cause costs to increase. Traditional absorption costing tends to focus on volume-related drivers, such as labor hours, while ABC also uses transaction-based drivers, such as number of orders received. In this way, long-term variable overheads, traditionally considered fixed costs, can be traced to products.
Some considerations that need to be examined prior to implementing ABC are fully
understanding the resource implications of implementing, having enough resources, costs outweighing the benefits, and the need for stakeholder buy-in.
Activity-based costing provides a more accurate method of product/service costing, leading to more accurate pricing decisions. It increases understanding of overheads and cost drivers; and makes costly and non-value adding activities more visible, allowing managers to reduce or eliminate them. ABC enables effective challenge of operating costs to find better ways of allocating and eliminating overheads. It also enables improved product and customer profitability analysis. It supports performance management techniques such as continuous improvement.
Kaplan, R.S. (2001). Introduction to Activity-Based Costing. HBS No.9-197-076.Boston, MA: Harvard Business School Publishing.