Activity-based costing (ABC)

What is Activity-based costing (ABC)?

Activity-based costing (ABC) is a widely used method for assigning costs in the field of logistics. It involves considering overhead expenses that are directly related to specific activities or tasks completed with a specific purpose. By doing so, ABC provides a more accurate breakdown of costs on a per client or per product basis.

In traditional costing methods, costs are allocated based on broad categories such as direct labor or direct materials. However, this approach may not accurately reflect the actual costs incurred by each activity or task. ABC, on the other hand, takes into account the specific activities that contribute to the overall cost of a product or service.

The first step in implementing ABC is to identify the activities that are performed within an organization. These activities can range from manufacturing processes to administrative tasks. Once the activities are identified, the next step is to determine the cost drivers associated with each activity. Cost drivers are the factors that cause costs to be incurred, such as the number of units produced or the number of hours worked.

After identifying the activities and their respective cost drivers, the next step is to assign costs to each activity. This is done by allocating the overhead expenses related to the activities based on their cost drivers. For example, if the cost driver for a particular activity is the number of units produced, the overhead expenses will be allocated based on the number of units produced.

The final step in ABC is to assign the costs of the activities to the products or services that benefit from them. This can be done by using cost allocation rates, which are calculated by dividing the total cost of each activity by its cost driver. By doing so, the costs can be accurately attributed to the specific products or services that utilize the activities.

One of the key advantages of ABC is its ability to provide a more precise breakdown of costs. This allows organizations to better understand the cost drivers and activities that contribute to the overall cost of their products or services. By having a more accurate understanding of costs, organizations can make informed decisions regarding pricing, resource allocation, and process improvement.

Furthermore, ABC enables organizations to identify and eliminate activities that do not add value to their products or services. By doing so, organizations can streamline their operations and reduce unnecessary costs. This can lead to improved efficiency and profitability.

In conclusion, activity-based costing (ABC) is a method for assigning costs that provides a more accurate breakdown of costs on a per client or per product basis. By considering the overhead expenses related to specific activities, ABC allows organizations to better understand their cost drivers and make informed decisions. It also enables organizations to identify and eliminate non-value-added activities, leading to improved efficiency and profitability in the field of logistics.