Managing Your Abc System

Don't let ABC distract you from making critical business decisions.

If we are to believe everything we read, then activity-based costing (ABC) is either a revolutionary tool

that will solve all our problems if we abandon our traditional and misguided ways, or it is a repackaged

version of absorption costing. I believe it is neither. Rather, ABC should be considered part of an overall

activity-based management accounting system to achieve higher-quality products and services at lower

costs.

Basically, an ABC system identifies the causal relationship between the incurrence of cost and activities,

determines the underlying "driver" of the activities, establishes cost pools related to individual "drivers,"

develops costing rates, and applies cost to product on the basis of resources consumed (drivers).

Some of the benefits to companies implementing an ABC system include the following:

* Multiproduct organizations may see a completely different ranking of their products' costs. This new

ranking reflects a correction of the benefits previously accruing to low-volume products.

* An improved awareness of the activities driving overhead costs may improve the control exercised

over the incurrence of such costs. It might generate an information base to facilitate the implementation

of a total quality management process to overcome problems limiting current performance.

* The use of nonfinancial indicators to measure cost drivers provides measures of performance in

addition to a means of costing production. Such measures are essential to eliminating waste and

nonvalue-added activities.

* The analysis of cost drivers provides a new perspective for the examination of cost behavior and the

subsequent analysis required in planning and budgeting.

* ABC increases the credibility and usefulness of costing information in the decision-making process

and makes it possible to compare interplant and interdivisional operations.

Despite its nuances and subtleties, an ABC system is still essentially an "historic cost" system. In certain

circumstances, its usefulness is doubtful, especially