Abstract-
Activity-based costing (ABC) is a forward-looking product costing method. Unlike traditional volume-based approaches which are historically oriented, ABC concepts guide managers in seeking the best strategies to pursue in the future. This product costing method can be a valuable tool in planning and managing costs not only in the manufacturing area, but in all aspects of business operation, from product design to distribution. Although its main advantage is its ability to provide more realistic product cost information for financial reporting purposes, use of ABC can lead to a better understanding of the strategic linkages existing between the various cost areas in the organization. It enables managers to have a holistic view of cost management.
Activity-based costing is useful in arriving at more realistic product cost information for financial reporting. However, it can also be used to help control costs in all areas of a business. The authors explain the basic premise, give an example of how it works, and show how it can be used to help managers develop successful strategies in running the business.
Cost information is good within the bounds of an accounting system, but for running the business it's of little value." Anonymous plant general manager.
Product costs are routinely calculated for inventory valuation, a critical element of externally published financial statements. While required for GAAP financial reporting, such information is of limited use to managers who run the business. Running the business means making important decisions such as product mix, product pricing, and product emphasis. Activity-based costing (ABC) provides managers with useful product cost information for making these decisions.
ABC is ...