While cost allocation procedures are by nature arbitrary, well designed ABC systems use cause-and-effect criteria for defining how costs are to be allocated. This is further illustrated in the accompanying Case Study.Īnother misconception is that ABC systems cannot calculate product costs accurately because of the difficulty in tracing activity costs to products if activities are not performed on the products. But one of the products may be responsible for a greater share of the overhead costs associated with the part because the product in question has a less stable production schedule and is the cause of most of the expediting costs associated with the part. If the activity-based cost of a part is developed from cost roll-ups, each product using that part will bear an equal share of the overhead costs associated with the part. Care must be taken with this approach to product costing, sometimes called roll-up costing. Some proponents of ABC suggest that the cost of a product can be computed by calculating the activity-based cost for each component and subassembly. The purpose here is to provide a road map that will increase the likelihood of success.
Another major reason for failure is a faulty planning, design, and implementation strategy. Many companies are doomed to failure before they begin installing ABC systems, in part due to a number of misconceptions about ABC systems and what they are actually designed to accomplish. Many organizations have found the pursuit of this mission can best be achieved by installing activity-based costing (ABC) systems. Companies, successful in disseminating relevant information, i.e., providing information empowerment to all levels of their operations, can be on their way to becoming world class organizations. If a company can't maximize information gathering and utilization capacity, it will be left in the wake of those who can. He then provides a comprehensive case analysis to illustrate the merits of ABC systems modeling and how computer technology can and should be used in making ABCīusinesses operate in an uncertain and competitive world accurate cost information is a primary weapon for survival and success, whatever the industry. He first presents the whys and wherefores of ABC. The author has developed a primer on activity-based costing (ABC).
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