Abc Costing Paper

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Activity-based costing (ABC) is a costing model that identifies activities in an organization and assigns the cost of each activity resource to all products and services according to the actual consumption by each. It also assigns more indirect costs (overhead) into direct costs. In business organization, the ABC methodology assigns an organization's resource costs through activities to the products and services provided to its customers. It is generally used as a tool for understanding product and customer cost and profitability. As such, ABC has predominantly been used to support strategic decisions such as pricing, outsourcing and identification and measurement of process improvement initiatives. Activity based costing first introduced in 1987, by Robert Kaplan and Robin Cooper as a chapter in their book Accounting and Management: a Field Study Perspective. Kaplan and Cooper’s focus was on manufacturing environments where increasing technology and productivity improvements have decreased the percentage of costs represented by direct labor and materials (Weiner). “Traditionally cost accountants had arbitrarily added a broad percentage of expenses into the direct costs to allow for the indirect costs,” states Robert Kaplan, a Baker Foundation Professor at Harvard Business School. However as the percentages of indirect or overhead costs rise, this technique became increasingly inaccurate because the indirect costs were not caused equally by all the products. Instead of using broad arbitrary percentages to allocate costs, the ABC model seeks to identify cause and affect relationships to objectively assign costs. Once costs of the activities have been identified, the cost of each activity is attributed to each product to the extent that the product uses the activity. This way ABC identifies areas of high overhead costs per unit and directs attention to finding ways to reduce the costs (Kaplan). The Computer Aided Manufacturing-International defines Activity Based...
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