“ABC Costing” Impact

ABC Costing is a powerful tool for every company.
Activity-Based Costing is ideal to improve costs and optimize product and service quality.

The latest trend in management tools begins with ABC, the initials for Activity-Based Costing.

ABC Costing is a powerful company strategy that enables companies to reduce waste, to improve services, to guarantee quality initiatives, to aim at continuous improvement, and to evaluate with precision product costs.

Companies, especially those which many products, high indirect costs, and fierce competition, have adopted Activity-Based Costing (ABC), instead of “assigning” costs arbitrarily or by estimating, they “seek” for each expense category related to a cost object and they assign to each area the expenses that they have actually incurred.

This technique accompanies the most modern company vision of business processes and represents the only way of estimating activity costs (that represent, at the same time, human resources and / or material use).

We all know that the activities performed by functional organizations are not the ones that guarantee customer satisfaction, but the activities performed by these sectors are like gears, which are integrated within processes that do aim at reaching those objectives.

In practice, generally, it is difficult to establish how much different activities performed in each department can cost. It is necessary to look for an adequate procedure to determine the costs of each process, and from then on to think of ways to decrease those costs.

Every business can be easily unfolded in a series of activities and tasks done by one or more people. Expenses such as telephone bills, supplies, salaries, and trips can be differentiated for each department.

Activity-based costing (ABC) is the only method that allows you to calculate each process cost. Through this tool you can have an idea of all the expenses that occur in the company, based on activities.

There is another tool, a very useful one, which complements perfectly with ABC Costing, Process Value Analysis. It consists of eliminating activities which do not add value to the customer or to the company business; for those activities which do add value, it is possible to evaluate, through this technique plus ABC, the existing mechanisms and, when possible, to substitute others with lower costs.

Another important function of ABC is connected with quality, in determining costs of good/bad quality through obtaining, in an accurate way, prevention costs, validation and internal and external flaws that are part of the costs of good/bad quality. These are difficult to evaluate with traditional costing practices.

ABC Costing is a tool that allows you to work from a processes perspective. It is very easy to combine with other tools. It helps to determine the importance of each cost within a process and to define its incidence in the finished product, providing indispensable elements for the Continuous Improvement Processes.