Learn how activity-based costing can help organizations make more informed decisions on prices, product and service viability, and outsourcing.
- Have you ever wondered what drives the cost of overheads in your business. Or whether you are setting appropriate prices for the products and services that your business produces. Well then guess what. Activity Based Costing can help you and your business. You see, by assigning overhead costs to the products that consume them, ABC provides a higher level of certainty on the costs of production. So why does all this matter, you might be wondering. Well, when used correctly, ABC can help finance staff, managers, and thought leaders to make important decisions. Such as opportunities to streamline the business. Now by this we mean, whether the same activity is potentially being preformed in multiple parts of the organization. Next, whether fair prices are being set for products and services. Did you know that this is particularly relevant, in some government agencies that are required to recover costs, but to not make a profit? Next, market testing the prices of your businesses products and services. Well this can help determine whether or not to outsource the delivery of some products or services. Or potentially to even discontinue them. And lastly, where to allocate marketing dollars. There are plenty of other wonderful applications of ABC. But this should give you a decent taste. At this point, you're probably wondering whether ABC can be used for all businesses. Look, not exactly. Lets say that you run a house painting business. Okay, your business will certainly have overheads, but at the end of the day, you only provide one service. And that's painting. If you have plenty of work on, and the business is still making a loss, well then either the cost of running the business, that is your overheads, are too high. Or you're simply not charging enough for your services. A simple monthly profit and loss statement will help to answer this question. You're not really going to benefit from ABC. Clearly ABC is better used for more complex businesses. And government enterprises. Where overhead costs make up a much larger percentage of total expenditure. And support multiple services or product lines. Let me share and example with you. Say you work for an accounting firm that provides a range of services such as auditing, budgeting, and strategic accounting. Now the direct cost of providing these services to customers should be pretty easy to work out. After all staff are most likely going to be dedicated to providing just one of these services. But to derive a full cost, which we can then use to assist in pricing, we do need to understand more about what drives overheads. For example, audit services might consume a huge chunk of IT dollars to record various events, track status, and meet compliance requirements. Now, we should be attributing these systems cost, to the audit strain. Rather than just treating as a bucket of general overheads. Where every service would get a share of this cost. By understanding what drives overhead costs. ABC can be used to more effectively set prices. And make key decisions on the commercial viability of these products and services.
- Why use activity-based costing (ABC)?
- How ABC can help organizations make more informed decisions
- Defining cost objects and activity drivers
- Reviewing source data
- Building the ABC model
- Preparing ABC reports
- Advising stakeholders on outcomes