BNET Business Dictionary
Business Definition for: Activity Based Costing
- a method of calculating the cost of a business by focusing on the actual cost of activities, thereby producing an estimate of the cost of individual products or services.
Example: An ABC cost-accounting system requires three preliminary steps: converting to an accrual method of accounting; defining cost centers and cost allocation; and determining process and procedure costs.
Businesses have traditionally relied on the cash basis of accounting, which recognizes income when received and expenses when paid. ABC's foundation is the accrual-basis income statement. The numbers this statement presents are assigned to the various procedures performed during a given period. Cost centers are a company's identifiable products and services, but also include specific and detailed tasks within these broader activities. Defining cost centers will of course vary by business and method of operation. What is critical to ABC is the inclusion of all activities and all resources.
Once cost centers are identified, management teams can begin studying the activities each one engages in and allocating the expenses each one incurs, including the cost of employee services.
The most appropriate method is developed from time studies and direct expense allocation. Management teams who choose this method will need to devote several months to data collection in order to generate sufficient information to establish the personnel components of each activity's total cost.
Time studies establish the average amount of time required to complete each task, plus best- and worst-case performances. Only those resources actually used are factored into the cost computation; unused resources are reported separately. These studies can also advise management teams how best to monitor and allocate expenses that might otherwise be expressed as part of general overheads, or go undetected altogether.
- Abbr. ABC
Additional Resources
- Activity-Based Management for E-Commerce
- This paper explores the application of Activity-Based Costing and Activity-Based Management in e-commerce. A case study of a fictitious Business-to-Customer (B2C) company is used to illustrate the implementation and effects of an Activity-Based Costing analysis. The analysis is performed by using matrixes in order to trace overhead. The Activity-Based Costing...
- White papers 2004-08-31
- Activity-Based Costing For E-Business
- This paper proposes the use of Activity-Based Costing to more effectively track costs associated with E-Business. It discusses the usefulness to E-Business of Activity-Based Costing, which is already proven to be beneficial to manufacturing companies. It
- White papers 2001-08-05
- Activity Based Costing In The Information Age
- Activity Based Costing ABC is the method of measuring the cost and performance of activities and cost objects. The activity based model bridges the gap between the financial system and the various operational systems of the organization. The paper outlines the difference between ABC and traditional costing method. The simple...
- White papers 2003-01-01
- Adoption And Implementation Of Activity-Based Costing: A Web-Based Survey
- This paper presents the results of a Web-based survey that gathered evidence about the status of activity based costing adoption and implementation. Activity-based costing was introduced about 15 years ago and implemented initially by large manufacturing
- White papers 2003-01-01
- Activity-Based Costing
- Today, more and more organizations prefer Activity Based Costing ABC to traditional costing. ABC takes into account minute details regarding the activities and the factors that add up to the final cost. ABC is based on an activity hierarchy wherein the different activities influencing the cost build up are grouped...
- Presentations 2003-01-01
- Activity-Based Costing: Better Costing For Better Decisions
- Activity Based Costing ABC system traces cost incurred to the activities involved therein. It explores the relationship between activities and costs. ABC refines costing systems by focusing on individual activities as the fundamental cost object. It assigns costs to cost objects based on the activities undertaken to produce each product...
- Presentations 2003-01-01
- Activity-Based Costing And Activity-Based Management
- Activity Based Costing ABC system traces cost incurred to the activities involved therein. It explores the relationship between activities and costs. ABC refines costing systems by focusing on individual activities as the fundamental cost object. It assigns costs to cost objects based on the activities undertaken to produce each product...
- Presentations 2003-01-01
- Activity Based Costing at UPS
- This article mainly discusses a case of UPS who adopted Activity Based Costing. Activity Based Costing at UPS is a cross functional discipline requiring an understanding of work activities. Its focus is to identify the key activities within a function or process, measure the cost associated with the activities and...
- White papers 2003-01-01
- How Time-Driven Activity Based Costing Delivers On The Promise Of ABC
- Over the past few years, activity-based costing has enabled managers to see that not all revenue is good revenue, and not all customers are profitable customers. Unfortunately, the difficulties of implementing and maintaining traditional ABC systems have prevented activity-based cost systems from being an effective, timely, and up-to-date management tool....
- White papers 2003-07-01
- The A to Z of ABC Dictionaries: Activity Based Costing
- Activity-based costing initiatives can easily go awry if everyone isn’t using commonly understood terms. But creating a reference guide requires arriving at a consensus on what each definition should be. The paper says that language of business is imprecise. What one company defines as gross revenues another may call gross...
- White papers 1999-12-01
- An Overview Of Cost Management (CM)/Activity Based Costing (ABC) For PEO Business Managers
- Activity Based Costing ABC is a methodology, which makes the costing very process and activity centric. In ABC, resources are assigned to activities which, in turn, are assigned to cost objectives based on their use. Activity Based Management ABM approach seeks to achieve customer value through continuos management of activities....
- Presentations 2002-11-05
- Activity Based Costing
- Activity Based Costing ABC method assigns costs to cost objects based on the activities undertaken to produce each product or service. Such a costing method improves cost measurement by organizing information around activities. Activity Based Management ABM involves managing the activities of the organization using the ABC approach. The paper...
- Presentations 2003-01-01
- Activity Based Costing (ABC)
- Activity Based Costing ABC is a costing methodology that views the entire organization as a collection of distinct activities. These activities form the basis of computing the costs. ABC refines costing systems by focusing on individual activities as the fundamental cost object. It assigns costs to cost objects based on...
- Presentations 2004-02-16
- Calculating Activity Based Costing
- Activity based costing ABC attempts to create the big picture-crystal-clear, full, and accurate-by painting assorted little pictures.
- Articles 2007-02-01
- Activity Based Costing
- Activity Based Costing ABC refines costing systems by focusing on individual activities as the fundamental cost object. It assigns costs to cost objects based on the activities undertaken to produce each product or service. ABC calls for focusing on intermediary activities to calculate costs. ABC is a process-based costing method....
- White papers 2003-01-01
- Activity Based Costing: A Tool To Aid Decision Making
- Activity Based Costing ABC is a costing methodology that views the entire organization as a collection of distinct activities. These activities form the basis of computing the costs. ABC refines costing systems by focusing on individual activities as the fundamental cost object. It assigns costs to cost objects based on...
- Presentations 2003-01-01
- A Summary Of Activity-Based Costing Best Practices
- Activity-based costing ABC is a technique to more accurately assign the indirect and direct resources of an organization to the activities performed based on consumption. In the first stage, resource costs are assigned to activities based on the amount of resources consumed in performing the activity. In the second stage,...
- White papers 2003-01-01
- Activity-Based Costing and Predatory Pricing
- The article emphasises on activity based costing ABC. The assignment of indirect costs in a traditional costing system can lead to product-cost subsidization. This is where excessive costs are charged to high-volume products and insufficient costs are charged to low-volume products. The result can lead to increased consumer demand for...
- White papers 2003-01-01
- Activity-Based Costing: A Tool To Aid Decision Making
- From the executive summary: ‘Activity Based Costing ABC system assigns overhead costs to products or services using a two-stage process that focuses on activity. Identifying activity cost pools forms the first stage of ABC. In the second stage, cost drivers for each activity cost pool are identified and proportionally assigned...
- Presentations 2003-01-01
- Activity-Based Costing
- This presentation provides detail information on one of the most important strategic management tool known as Activity-Based Management. It enumerates one of its basic elements known as activity-based costing. Activity Based Costing is a modeling technique where costs are expressed in terms of Resources, Activities, and Products. It states that...
- Presentations 2003-01-01
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