Performance Management Solutions

What is Activity Based Costing?

Conventional financial information may explain what a product or service costs, but only activity based costing (ABC) explains why and we can use this as the basis of an activity based costing definition.

The distinction between the two is important; what a job, product, service or customer costs is merely interesting, but knowing why it costs what it does makes it actionable; actionable because only activity based costing:

• explains the cause and effect relationship between costs, resources, activities, cost drivers and customer, product, service and channel profitability
• focuses attention on activity based cost management
• enables activity based budgeting and activity based planning

Activity Based Cost Dynamics

As a business flexes and changes in response to the markets that it serves, the benefits of an Activity Based Costing model of the business that can respond to those changes quickly, easily and accurately are clear to see.

This is precisely what was described recently by Professor Robert Kaplan in his recent Harvard Business Review article "Time-based activity based costing".

Activity Based Analysis

Activity analysis must be both flexible and relevant to the needs of managers, and be easily accessible over the web.

Managers must be able to move rapidly past the validation of activity based costing data to the point where they understand the outputs such as business profitability, process costs or the cost of healthcare outcomes and the decisions that should be informed by such management information.

This is an area of constant development and not all costing systems yet offer managers these benefits. The information required from the activity analysis must be considered in detail prior to implementation of the model.

Activity Based Performance Management

Activity Based Costing combines well with the Balanced Scorecard to deliver an end-to-end performance management capability.

The Balanced Scorecard delivers the "line-of-sight" between what individuals do and the strategic direction of the organisation. By contrast, Activity Based Costing provides a clear understanding of the "cause-and-effect" relationships that drive costs and the performance of the business.