Question

One of the issues that often comes up is does the size of the company matter when determining whether or not to use ABC. Originally, it was thought that only larger companies should attempt to use ABC, especially as many struggled to implement it smoothly. However, over the last 20 years, especially as technology has advanced, many small businesses have found success using ABC as well. Douglas Hicks in the Journal of Accountancy's Yes, ABC is for Small Businesses, Too talks about the benefits he has found when his smaller clients have used ABC costing, providing a case study of one of his smaller clients. "Since adopting ABC four years ago, the company's sales have tripled, while its profits have increased fivefold. Much of this improvement came from a more profitable mix of contracts generated by a costing/quoting process that more closely reflects the actual cost structure of the company. This has enabled the company to improve the management of its contracts." (Hicks, 1999). Hicks goes on to talk about the fact that ABC is more than just a method of recording costs, but rather, cost control measures can be better utilized via ABC (Hicks, 1999). The key here is that ABC is really about allocating overhead and the better understanding a company has of their costs (i.e. accuracy), the better decisions they are able to make. I actually had a small client whose market was 2 ways radios who engaged in some major litigation - a tort claim - with a materials supplier. They won their case. However, due to their inaccurate manner of assigning costs through traditional costing which they did not realize until they were pretty far into the case, they were unable to get the damages they had hoped for as they had been continually undercharging clients for that particular product without realizing it. It is easy for a smaller company to make these errors as there may not be a lot of companies who sell in a similar market (as they may be in a nitch like my client) or they may be in a situation where information is not as easily accessible. I would actually argue that smaller companies need ABC more than larger companies as often they must operate more leanly and don't have the extra capital to cover for mistakes that an established company would. My client was definitely in that boat, and long term their error in costing was devastating to them. If size doesn't matter, what does matter? How do we determine who is a good fit for ABC?

Answer 1

Activity Based costing is an accounting methodology data science course to activities rather than products or services. This enables resources and overhead costs to be e more accurately assigned to products and services that consume them.

CIMA defines activity based costing as "An approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs. resources are assigned to activities and activities to cost objects based on consumption estimates. The latter utilise cost drivers to attach activity course to outputs."

​​​​​​To whom the ABC costing best suits for?

Simce activity-based costing is a mechanism of recording costs based on specific activities carried out at a stage of production and service, this system is best suitable for larger organisation where series of activities are involved in the process of their manufacturing ,packaging, supplying and in the end their operational system. This enables the management to make quick decisions regarding price and Cost Management effectively. For example management can determine the cost involved in each activity level and take measures to reduce as well as plan the cost accordingly.

However ABC costing can be also adopted by small organisations where oer activity drivers can be easily understood and Tracked. Once the activity drivers are analysed properly any NDT even small or large can adopt ABC costing in an effective manner.

The essence of success of of ABC costing lies at the stage where activity drivers are identified and cost are classified accordingly. Then only e this method can be effectively implemented.