Activity Based Costing: It is as simple as A-B-C!
We have all noticed the Economic growth over the past 18 months (not as much as our ‘Leprechaun Economics’ 26% growth spurt!), but gradual growth in most industries across the country. However, one challenge we hear from clients on a regular basis is that while Revenues are increasing, margins and profits are stagnant. The confidence of sales and growth are hindered by ongoing cash-flow challenges. The underlying challenge here is cost increases and supply chain leakages.While one solution to resolve this problem is is to undertake an Activity Based Costing (ABC) review so as to correctly allocate all costs underlying a product or service, by linking each direct and indirect cost to the activity that drives it. This ABC task discloses great detail to support pricing, tendering and cost reduction activities. ABC uses a P&L as the input tool to build cost models for service provision where both people and overheads are detailed in a cost, while for products, ABC allocates all costs to products by linking the cost of the activity that drives it to provide benefits such as;
- Elimination of under cost servicing with an accurate pricing model for all products/services, especially complex service Tenders where all aspects of the job can be fully costed from the outset
- Cost transparency to support cost reduction activities (with results such as www.arvo.ie/our-results)
- Remove/reduce “non value added” activities from the production process, saving significant time (often estimated to be 30% of the underlying costs in all processes), while improving output
- Determine how to positively impact sales price by adjusting costly inputs
- “Open book” transparency to share with and/or educate clients
So to summarise, Activity-based costing (ABC) is a costing methodology that identifies activities in an organisation and assigns the cost of each activity with resources to all products and services according to the actual consumption by each. Could a forensic ABC Review help business owners get more accurate product costing and help save time and reduce costs?