CIMA main Terminology defines activity-based costing as an approach to the costing and also monitoring the activities, which involves tracing source consumption and costing last outputs. Resources are assigned to tasks and tasks to price objects. The last use expense drivers to attach activity costs to outputs.

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ABC was an initial defined in the late 1980s by Kaplan and also Bruns. It have the right to be considered as the modern-day alternative to absorption costing, permitting managers to far better understand product and customer network profitability. This offers the service with far better information to do value-based and therefore an ext effective decisions.

ABC focuses attention on expense drivers, the tasks that reason costs come increase. Classic absorption costing tends to focus on volume-related drivers, such as work hours, while activity-based costing additionally uses transaction-based drivers, such as variety of orders received. In this way, irreversible variable overheads, traditionally thought about fixed costs, deserve to be traced to products.

The activity-based costing process:


What services does abc provide?

Activity-based costing provides a more accurate an approach of product/service costing, leading to much more accurate pricing decisions. It rises understanding that overheads and cost drivers; and also makes costly and non-value adding activities more visible, enabling managers to mitigate or eliminate them. ABC enables effective difficulty of operating prices to find far better ways that allocating and also eliminating overheads. It also allows improved product and also customer benefit analysis. It support performance monitoring techniques such as consistent improvement and also scorecards.

Questions to think about when implementing ABC

Do we fully understand the resource implications of implementing, running and managing ABC?Do we have the sources to carry out ABC?Will the prices outweigh the benefits?Can we easily identify every one of our activities and costs?Do us have enough stakeholder buy-in? What will it take to achieve this?Will the added information abc provides result in action that will increase overall profitability?
Actions to take it / DosActions to stop / Don"ts
Get buy-in native the rest of the business. Abc provides business managers, and the finance function, v the details needed to make value-based decisionsUse abc for pricing and also product prioritisation decisionsABC should be implemented by monitoring accountants together they are best placed to manage the process and come ensure services realisationDo not get recorded up in too much attention come detail and also control. It have the right to obscure the bigger photo or do the firm lose sight of strategic goals in a pursuit for little savingsIt is essential not to loss into the catch of thinking ABC expenses are pertinent for all decisions. Not all costs will disappear if a product is discontinued, an instance being building occupancy costs

In practice:Activity-based Costing

How Xu Ji completed standardisation in functioning practices and also processes (CIMA instance study, 2011)

The Chinese electricity firm Xu Ji used ABC to capture direct costs and variable overheads, i m sorry were lacking in the state-owned enterprise’s (SOE) timeless costing systems. The ABC experience has efficiently induced standardisation in their functioning practices and processes. Standardization was not a typical notion in Chinese culture or in place in many Chinese companies. ABC likewise acts as a catalyst to Xu Ji’s IT breakthroughs – an initial accounting and also office computerisation, climate ERP implementation.

Prior to the ABC arrival in 2001, Xu Ji operated a classic Chinese state-enterprise bookkeeping system. A big amount that manual audit work to be involved. Audit was driven primarily by external financial report purposes, and inaccuracy the product costs came to be inevitable. In ~ this time, Xu Ji underwent a series of flotations complying with China’s advent of totally free market competition.

The inaccuracy that the traditional costing information seriously bind Xu Ji’s capability to compete on pricing. The two main tasks for the ABC device were to: trace straight labour costs directly to product and customer contracts; and also allocate manufacturing overheads on the basis of up-to-date straight labour hrs to contracts.

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Lessons learned

The typical ‘top-down’ monitoring style and also organisational society among SOEs worked well once instigating fix up ideas and inducing corporate-wide learning. Top management’s commitment come trying out new management ideas and also investing in brand-new technology has been the distinctive feature.

Related and comparable practices

Time-driven activity-based costingActivity-based monitoring (ABM)