Activity-based costing first gained publicity in the early 1980s. It was developed as a logical
alternative to traditional cost management systems that tended to produce insufficient results
when it came to allocating costs. Harvard Business School Professor Robert S. Kaplan was an
early advocate of the ABC system.
Due to a changing business world and strong competition, the cost structure in many
companies changed, while facing an increased price pressure. When profit margins are
decreasing, companies are focusing not only on external but also internal opportunities to
improve their cost structures and to make hidden costs transparent. This lead to the
introduction of Activity-based costing (ABC) as a new approach of process thinking to make
the internal organization more flexible to react to changes in the production process and
allocation of costs as well as to deal with overcapacities. This paper will focus on the ABC tool, which is aiming at transparency, efficiency increase and improvement of the given cost calculation systems. The ABC method enables management to optimize the enterprise with detailed information for
a thorough decision making process. ABC is a method for developing cost estimates, based on the activities used within the
production process per cost object. To develop a cost estimate the most important activities
within the production cycle – the cost drivers - need to be identified. The activity must be
definable and measured in units, e.g. number of man hours. After all activities for producing
the product are known, a cost estimate is prepared for each activity. These individual cost
estimates contain all labour, materials and equipment costs, including overhead, for each
activity. Each complete individual estimate is added to the others to obtain an overall
estimate. To gain sufficient cost estimates, data must be collected and verified to make ABC a
functional and precise tool. This chapter leads through the necessary steps to implement the
ABC approach and its methodology.
Inhaltsverzeichnis (Table of Contents)
- 1. Introduction
- 2. Methodology
- 2.1 Internal setup within the organization
- 2.2 Conceptual implementation
- 3. Effects of cost allocation
- 4. Conclusion
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
The paper explores Activity-Based Costing (ABC) as an alternative to traditional cost management systems, which often fail to accurately allocate costs. It examines how ABC can improve transparency, efficiency, and decision-making processes within organizations.
- The evolution of cost management systems and the limitations of traditional methods
- The application of ABC to address cost allocation challenges in a changing business environment
- The impact of ABC on cost transparency, efficiency, and decision-making
- The steps involved in implementing ABC methodology
- The benefits and challenges of implementing ABC within organizations
Zusammenfassung der Kapitel (Chapter Summaries)
- Chapter 1: Introduction
This chapter introduces the concept of Activity-Based Costing (ABC) as an alternative to traditional cost management systems. It discusses the challenges faced by traditional systems in accurately allocating costs, particularly in a changing business environment characterized by increased competition and price pressure. The chapter highlights how ABC addresses these limitations by providing a more comprehensive and accurate approach to cost allocation, enabling organizations to improve transparency, efficiency, and decision-making processes.
- Chapter 2: Methodology
This chapter delves into the methodology of ABC, outlining the steps involved in developing cost estimates based on the activities used within the production process. It emphasizes the importance of identifying and quantifying cost drivers, which represent the key activities that influence costs. The chapter also examines the internal setup required for successful ABC implementation, including the commitment of management and the establishment of clear objectives for its use.
Schlüsselwörter (Keywords)
Activity-Based Costing, cost management, traditional costing systems, cost allocation, process thinking, cost drivers, transparency, efficiency, decision-making, implementation, methodology, benefits, challenges.
- Quote paper
- Diplom Betriebswirt (BA) Patrick Zeuner (Author), 2007, Activity-based Costing, Munich, GRIN Verlag, https://www.grin.com/document/91444
