Activity Based Costing, better known by the acronym ABC, is a enterprises cost management method  that is based on the calculation of the full cost of products / services, by determining the costs of activities to achieve them.

Let’s first step back a little to understand why, at present, this strategy is so widespread, especially in service industries.

First of all, attention should be paid to those who have been, in recent years, the changes in the business, in a competitive context.

The market, today, is characterized by a high variety and variability. The products and services are increasingly personalized. Flexibility is the first imperative. And finally, globalization.

In this context, the traditional strategy of cost management have lost their effectiveness.

Businesses need to create a real culture of quality, thanks to new techniques of management and staff training pointing on innovation and creativity.

Compared to before, the manager now puts much more attention to all those activities that are not strictly related to production. In essence, in recent years it has clearly increased the intensity of indirect costs. Most of the companies identified in the ABC the right solution to handle them.

Activity Based Costing: features and objectives

Thanks to Activity Based Costing are first calculated the cost of each activity, which only later will be associated with products / services.

It is good to clarify that the cost of a product / service includes the cost of raw materials, direct necessary workforce and indirect costs. In turn, indirect costs are divided into those related to the productive activities and those deriving from ancillary activities.

Compared to traditional methods, the Activity Based Costing does not calculate the indirect costs of the support activities in a subjective way, but obtains them from the activities.

This leads to an important feature of the ABC method, as well as its main objective. Choosing this cost management strategy, the aim is to determine the full cost of the product without any distortion, first identifying the activities required to achieve it.

Implementation of the ABC method

To achieve effectively the Activity Based Costing strategy, you must go through four stages necessarily :

• Analysis of available data
• Understanding of data
• Development of the system
• Evaluation of the results

However, in order to generate tangible and long term benefits , it will be important to avoid excessive detail. That is, this method makes sense if fluid. It is also important to understand when it is the right time to replace the traditional method with the new cost management.

Adopt the Activity Based Costing strategy, finally, it will generate a significant cultural change within the company. In fact, parallel to the costing system, will also change the personnel performance evaluation criteria, starting from the managers. The board is therefore to proceed to the implementation of the ABC in a gradual manner, but especially after thorough preparation.

Contact us for more information on the cost management developed as part of Outsourcing. For all your needs we have a solution: discover it now!