Examine individual changes

''''Activity-based costing''' ('''ABC''') is a costing model that identifies activities in an organization and assigns the cost of each activity resource to all products and services according to the actual consumption by each: it assigns more [[indirect costs]] ([[overhead (business)|overhead]]) into [[direct costs]]. In this way, an organization can precisely estimate the cost of individual products and services so they can identify and eliminate those that are unprofitable and lower the prices of those that are overpriced. In a business organization, the ABC methodology assigns an organization's resource [[cost]]s through activities to the [[Product (business)|product]]s and [[Service (economics)|services]] provided to its customers. It is generally used as a tool for understanding product and customer cost and profitability. As such, ABC has predominantly been used to support strategic decisions such as pricing, outsourcing, identification and measurement of process improvement initiatives. ===Historical development=== Traditionally cost [[accountant]]s had arbitrarily added a broad percentage of expenses into the indirect cost. {{Citation needed|date=September 2010}} In addition, activities include actions that are performed both by people and machine. However, as the percentages of indirect or [[overhead cost]]s rose, this technique became increasingly inaccurate, because indirect costs were not caused equally by all products. For example, one product might take more time in one expensive machine than another product&mdash;but since the amount of direct labor and materials might be the same, additional cost for use of the machine is not being recognized when the same broad 'on-cost' percentage is added to all products. Consequently, when multiple products share common costs, there is a danger of one product subsidizing another. ABC is based on George Staubus' Activity Costing and Input-Output Accounting.<ref>Staubus, George J. Activity Costing and Input-Output Accounting (Richard D. Irwin, Inc., 1971).</ref> The concepts of ABC were developed in the [[manufacturing sector]] of the United States during the 1970s and 1980s. During this time, the [[Consortium for Advanced Management-International]], now known simply as CAM-I, provided a formative role for studying and formalizing the principles that have become more formally known as Activity-Based Costing.<ref>[http://www.cam-i.org Consortium for Advanced Manufacturing-International]</ref> Robin Cooper and [[Robert S. Kaplan]], proponents of the [[Balanced Scorecard]], brought notice to these concepts in a number of articles published in ''Harvard Business Review'' beginning in 1988. Cooper and Kaplan described ABC as an approach to solve the problems of traditional [[cost management|cost management systems]]. These traditional costing systems are often unable to determine accurately the actual costs of [[Factors of production|production]] and of the costs of related services. Consequently managers were making decisions based on inaccurate data especially where there are multiple products. Instead of using broad arbitrary percentages to allocate costs, ABC seeks to identify cause and effect relationships to objectively assign costs. Once costs of the activities have been identified, the cost of each activity is attributed to each product to the extent that the product uses the activity. In this way ABC often identifies areas of high overhead costs per unit and so directs attention to finding ways to reduce the costs or to charge more for costly products. Activity-based costing was first clearly defined in 1987 by [[Robert S. Kaplan]] and [[W. Bruns]] as a chapter in their book ''Accounting and Management: A Field Study Perspective''.<ref>Kaplan, Robert S. and Bruns, W. ''Accounting and Management: A Field Study Perspective'' (Harvard Business School Press, 1987) ISBN 0-87584-186-4</ref> They initially focused on manufacturing industry where increasing technology and productivity improvements have reduced the relative proportion of the direct costs of labor and materials, but have increased relative proportion of indirect costs. For example, increased automation has reduced labor, which is a direct cost, but has increased depreciation, which is an indirect cost. Like manufacturing industries, [[financial institution]]s have diverse products and customers, which can cause cross-product, cross-customer subsidies. Since personnel expenses represent the largest single component of non-interest expense in financial institutions, these costs must also be attributed more accurately to products and customers. Activity based costing, even though originally developed for manufacturing, may even be a more useful tool for doing this.<ref>Sapp, Richard, David Crawford and Steven Rebishcke "Article title?" ''Journal of Bank Cost and Management Accounting'' (Volume 3, Number 2), 1990.</ref><ref>Author(s)? "Article title?" ''Journal of Bank Cost and Management Accounting'' (Volume 4, Number 1), 1991.</ref> Activity-based costing was later explained in 1999 by [[Peter F. Drucker]] in the book ''Management Challenges of the 21st Century''.<ref>Drucker Peter F.''Management Challenges of the 21st Century''. New York:Harper Business, 1999.</ref> He states that traditional cost accounting focuses on what it costs to ''do something'', for example, to cut a screw thread; activity-based costing also records the cost of ''not doing'', such as the cost of waiting for a needed part. Activity-based costing records the costs that traditional cost accounting does not do. The overhead costs assigned to each activity comprise an activity cost pool. ==Prevalence== Following initial enthusiasm, ABC lost ground in the 1990s, to alternative metrics, such as Kaplan's [[balanced scorecard]] and [[economic value added]].<ref name="katz"/> {{quotation|ABC has stagnated over the last five to seven years,|Kaplan, 1998}} However, application of an activity based recording may be applied without change to incremental '''activity based accounting''' not replacing any synoptic and retrospective modeling process with ''costing'', but to transform concurrent process accounting to a most authentic approach. ===Public sector use=== ABC is widely used in the public sector{{Citation needed|date=January 2010}}, including by the [[United States Marine Corps]].<ref name="katz"/> Its use by the [[UK Police]] has been mandated since the 2003-04 [[UK tax year]] as part of England and Wales’ National Policing Plan, specifically the Policing Performance Assessment Framework.<ref>[http://police.homeoffice.gov.uk/publications/finance-and-business-planning/ABC_Manual_of_Guidance2835.pdf?view=Binary Police Service National ABC Model Manual of Guidance Version 2.3 June 2007]</ref> An independent 2008 report concluded that ABC was an inefficient use of resources: it was expensive and difficult to implement for small gains, and a poor value, and that alternative methods should be used.<ref>[http://police.homeoffice.gov.uk/publications/police-reform/Review_of_policing_final_report/flanagan-final-report2835.pdf?view=Binary The Review of Policing Final Report by Sir Ronnie Flanagan February 2008 ]</ref> Furthermore, the South African government, specifically the National Treasury has tasked specialists to craft a master guideline for local government in South Africa, for purposes of cost optimisation, tariff setting, balanced budget setting and equitable fund allocations ==References== {{Reflist}} Drucker, Peter F.. Management Challenges of the 21st Century. New York:Harper Business, 1999. ==External links== * [http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962270 Who Wins in a Dynamic World: Theory of Constraints Vs. Activity-Based Costing?] article on SSRN * [http://www.ifac.org/Guidance/EXD-Details.php?EDID=0114 International Federation of Accountants proposed International Good Practice Guidance on Costing to Drive Organizational Performance] {{Use dmy dates|date=September 2010}} {{DEFAULTSORT:Activity-Based Costing}} [[Category:Management accounting]] [[da:Activity-based costing]] [[de:Prozesskostenrechnung]] [[fr:Activity-based costing]] [[ko:활동기준 원가계산]] [[it:Activity Based Costing]] [[hu:Folyamatköltség-számítás]] [[nl:Activity-based costing]] [[ja:活動基準原価計算]] [[no:Aktivitetsbasert kostnadskalkulasjon]] [[pl:Rachunek kosztów działań]] [[pt:Custeio baseado em atividades]] [[ru:Расчёт себестоимости по видам деятельности]] [[sr:АБЦ анализа]] [[sv:ABC-kalkyl]] [[th:ต้นทุนฐานกิจกรรม]] [[uk:Процесно-орієнтоване управління витратами]] [[vi:Quản lý chi phí trên cơ sở hoạt động]] [[zh:作业成本法]]'