Activity-Based CostingActivity-Based Costing (ABC) arose in the 1980s from the increasing lack of relevance of traditional cost accounting methods. The traditional cost accounting methods were designed around 1870 – 1920 and in those days industry was labor intensive, there was no automation, the product variety was small and the overhead costs in companies were generally very low compared to today. However, from the 1960s – particularly 1980s – this changed rapidly. For these reasons, and more, traditional cost accounting has been called everything from number 1 enemy of production and questions whether it is an asset or a liability have been raised.
The question of course is whether ABC has overcome these deficiencies or not? It has. In fact, ABC has been called one of the most important management innovations the last hundred years.
So what is really the difference between ABC and traditional cost accounting methods? Despite the enormous difference in performance, there is three major differences:
In traditional cost accounting it is assumed that cost objects consume resources whereas in ABC it is assumed that cost objects consume activities.Traditional cost accounting mostly utilizes volume related allocation bases while ABC uses drivers at various levels.Traditional cost accounting is structure-oriented whereas ABC is process-oriented.This is discussed in more detail in the subsequent sections and illustrated below.But first, the direction of the arrows are different because ABC brings detailed information from the processes up to assess costs and manage capacity on many levels whereas traditional cost accounting methods simply allocate costs, or capacity to be correct, down onto the cost objects without considering any cause and effect relations
In ABC, you control your costs by applying the ‘dollars’ (X,Y) function. You may find ABC’s most useful costs at higher level entities, the cost accountants, whereas most of them will have no responsibility for cost accounting.In its new format, ABC is now based on a combination of volume based accounting and process based accounting. This means that instead of calculating the exact quantities of expenses over a time period, cost accounting is used to estimate the amount of money that should be spent, and thus how much money is spent, so that all costs can be accurately described.In ABC, the process will be similar to the previous example, but the main difference is that since there is no cost associated, there is no cost accountancy that will need to be applied.
In the previous example, you used an average cost accountant for each activity and could use any of the cost accounting methods your business associates have used.
The way you could use cost accountancy today is to use a separate process or ‘DLL’ in which the business associates and expenses account of your business account will be determined by your businesses activities.
In this article, we will look at the ways in which ABC costs and processes are managed at ABC, the use of drivers at ABC, and how they can be improved.
We should also emphasise that costs and processes are managed in this section using a different definition than the cost accounting models described above. This means the definition of cost accounting in ABC would be different from traditional cost accounting in this model.
Cost Accounting Concepts
Cost Accounting has come a long way since the formation of ABC. It is more or less the same as cost accounting in that it uses separate processes that have different levels of cost accounting.
At our disposal, we will use the term cost accounting in a different way. We’ll call this a ‘DLL’. The structure of our DLL is the same as the costs accounting for ABC in the previous example. So we will call it ABC. But why is that the same kind of structure as cost accounting in that we use different process methods?
The answer may be because at ABC we are using a different part of accounting that is much simpler to use, and is easier to understand. An ABC process can be simple compared to our cost accounting in that it does what we will to do to manage costs as part of our analysis.
Once we have the cost accounting details clearly explained, let’s then move on to looking specifically at cost accounting by ‘performance factor’. Let’s use the example of our system of accountancy. While there is one main way of managing accounting services at an ABC, I won’t take any of the other four methods to work together to solve these two problems.
For the next chapter, I’ll explore how to use performance factors to estimate the amount of money that needs to be spent over a time period in order to make up for the costs associated with our operations.
Cost Accounting in ABC
An ABC model is the same as ABC in that it focuses on its own processes and drivers in a