Activity Based Costing

Activity Based Costing (ABC) supplies information rather than solutions. It enables any business quickly and easily to identify the true cost of any process or product, course of action or function, and will typically take 90% of overheads and drive them down to these levels. At the end of the day, everything is reconciled back to the general ledger.

Activity Based Costing is as relevant in service industries as in manufacturing, and can be used alongside conventional costing systems, either as a standalone management tool, or as part of a continuous improvement culture, or a positive programme of business re-engineering.

An ABC Model allows you to cost the Non Value Adding activities within a process or business:

VA = Value Adding

NVA = Non Value Adding

SNVA = Sustaining Non Value Adding

Activity Based Costing tracks the costs of activities, regardless of where they are incurred. It is now a well-established technique, recognised for its ability to cross departmental and functional boundaries in its search for cost contributors, whose existence will continue to elude more traditional costing approaches.

The cost stack supplied by Activity Based Costing enables costs to be categorised as adding value, as adding no value or as being sustaining to the business itself, and therefore necessary. It is an accounting technique which reveals far more than fiscal cost alone.