Who applies ABC Costing?
Companies that meet one or more of the following needs apply ABC costs:
- Companies that need to know costs for processes and products accurately.
- Companies that have different costs and expenses for distribution and sales per client and need to identify them to know which clients are profitable and which are not.
- Companies that make activity-based quotes, through quotas or rates obtained by activity and process required by the prospect or client.
What is Activity-Based Costing?
ABC costing, for its acronym in English for Activity-Based Costing, is a methodology that assigns costs more accurately, since in a first step it assigns resources (all costs and expenses recorded in the accounting) to activities and processes that the company carries out according to its actual consumption; in a second step, it assigns the cost of the activities and processes to the products or services based on how much each of them demands each activity.
What is Activity-Based Costing for?
To reduce costs through process improvements, modifying or eliminating costly activities that do not create value. To perform benchmarking, analyze outsourcing opportunities, rationalize costs and expenses, perform profitability analysis, quote based on activities, carry out pricing policies, replicate best practices between different locations, better use of resources, make activity-based budgets, have Key Performance Indicators, feed Business Intelligence and Balanced Scorecard systems.
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What are Resources?
These are all the costs and expenses recorded in the accounting system, such as: salaries and wages, electricity, stationery expenses, rent, depreciation of furniture and office equipment, raw materials, etc.
What are Activities?
These are all the actions that the organization performs to produce, store and deliver all products or services to its customers. Example: Promoting products, taking orders, producing items, maintaining production lines, delivering products, charging customers, etc.
What are Cost Objects?
This is everything that the organization needs to know its cost. Example: Products, Services, Product Lines, Customers, Customer Groups, Sellers, Distribution Channels, Sales Regions, Distribution Centers, or any other business segment
What companies require ABC?
ABC costing generates relevant business information in all types of companies and industries: Food and Beverages, Metalworking, Chemicals, Manufacturing, Pharmaceuticals, Commercial Banking, Development Banking, Stock Exchange, Financial Services, Government Sector, Logistics, Services.
What is Activity-Based Management?
ABM, the acronym for Activity-Based Management, is the use of information generated by Activity-Based Costing to manage the business by managing activities and capturing opportunities for process improvement and cost reduction.
What is a Resource Driver?
Cost Driver or Cost Generator is the concept that will be used to distribute the cost of Resources to Activities. Example: Payroll Weights, Number of Employees, Square Meters, Time per Activity, etc.
What is an Activity Driver?
Cost Driver or Cost Generator is the concept that will be used to distribute the cost of Activities to other activities or cost objects based on how much each of them demands from the activity. Examples: Number of Visits to Clients, Number of Sales Calls, Number of Pallets, etc.
Is it necessary to use software for Activity-Based Costing projects?
It depends on the Objective of the Project and the size of the model that is generated. For small projects or projects where the results will not be repeated continuously, projects can be managed in Microsoft® Excel® or Access®. Projects where the costing reaches the customer-product level or a higher level of detail are recommended using specialized ABC Costing tools, since cost assignments become more complex and the amount of information generated becomes more difficult to analyze. Pilot projects to perform proof of concept tests could be carried out in Microsoft® tools.
Is it necessary to use Business Intelligence software in Activity-Based Costing projects?
In projects where a lot of cost and profitability information is generated for multiple business segments, it is highly recommended, since it makes the analysis of the results much more user-friendly and effective, and it facilitates the detection of areas of opportunity.
What aspects should be considered when deciding which software to use for ABC?
Ease of use by the area responsible for the model and/or by support systems in the organization Flexibility for modeling business processes Transparency in cost transfers Ability to manage the model according to the project objective and its future growth, especially that it can contain all the business segments that will facilitate analysis and decision making Integration with the information sources available to the organization Technical support from the manufacturer
How long does it take to implement Activity-Based Costing?
It depends on the size of the organization, the level of detail expected to be achieved in the project, the team involved in the project, the availability of information and the ease of extracting it from the systems in which it is located. A pilot project with a very limited scope that serves as a proof of concept can take between 2 and 4 months.
What benefits are obtained with ABC costing?
Those who apply ABC Costing seek benefits such as:
- Cost Reduction
- Increased Profitability
- Precise costs to quote and carry out differentiated pricing strategies by market or by level of service delivered
- Precise budgets