Activity-based costing (ABC) is a special costing model that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each. This model assigns more indirect costs (overhead) into direct costs compared to conventional costing models. Aims of model
With ABC, an organization can soundly estimate the cost elements of entire products and services. That may prepare decisions on either identify and eliminate those products and services that are unprofitable and lower the prices of those that are overpriced (product and service portfolio aim) or identify and eliminate production or service processes that are ineffective and allocate processing concepts the lead to the very same product at a better yield (process re-engineering aim).
In a business organization, the ABC methodology assigns an organization's resource costs through activities to the products and services provided to its customers. ABC is generally used as a tool for understanding product and customer cost and profitability based on the production or performing processes. As such, ABC has predominantly been used to support strategic decisions such as pricing, outsourcing, identification and measurement of process improvement initiatives.
Following initial enthusiasm, ABC lost ground in the 1990s, to alternative metrics, such as Kaplan's balanced scorecard and economic value added. An independent 2008 report concluded that manually driven ABC was an inefficient use of resources: it was expensive and difficult to implement for small gains, and a poor value, and that alternative methods should be used. Other reports show the broad band covered with the ABC methodology.
ABC has stagnated over the last five to seven years,
— Kaplan, 1998
However, application of an activity based recording may be applied without change in methodology to an...
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