Why use activity based costing software to cost products and services

Direct costs

 

When costing products or services, both direct costs and overhead costs should be considered. Assigning direct costs to products or services is relatively easy.

Example 1: Materials used: The number of items of material required by a product or service is easily determined.

Example 2: Direct labor costs: These can be assigned based on the number of hours worked on a particular product or service. This is straightforward costing process.

 

Overhead costs

 

Overhead costs are more difficult to assign. For many organizations indirect overheads can be significantly larger than direct costs. Often some arbitrary method is used to assign indirect cost. The result is that many businesses may not fully understand the cost components of their products or services and what drives them.

The solution is Activity Based Costing. This is a tried and true method that is used to assign indirect overhead costs to products / services in a meaningful way.


 

ABC Focus software

 

ABC Focus is a modern software application that assists with calculating the costs and profits of products, services and customers. It uses activity based costing to assign indirect overheads in a reasonable way. The software has an organized and well-structured approach.

 

ABC Focus also can be used to re-engineer the activities of the business. It shows the costs with a view to reduce the consumption of resources. It provides a structured approach to the analysis process. It makes it easy to review the resources that each product or service or customer requires for the business to deliver its goods or services.

 

It includes additional tools to help improve the budgeting process and to implement "output budgeting" – i.e. decide what the objective is and then work the budget back from that.

 

ABC Focus provides a solution for measuring the impact of key organizational decisions such as outsourcing activities and creating new activities or products / services.

 

 

Cost objects

 

ABC Focus is designed to implement activity based costing ("ABC") in any business or organization. It can cost anything: products made or sold, services provided, customers, processes, markets. The "things" to be costed are referred to as the cost objects. The program can cost existing operations as well as future products or activities. Also, it works in reverse – it can calculate the budget from the products and activities the organization wants to produce.

 

By using ABC Focus an organization will have a better appreciation of its costs and activities. The program acts as a guide through the analysis process and assists with the management of costs and activities. The program can identify value-adding (and value-destroying) activities and products. It aids with cost management and control.

 

ABC Focus analyzes both direct and indirect costs. Direct costs include direct labor, materials and expenses and these are assigned directly to the products and services, or cost objects, which consume them. Indirect costs (sometimes called "overheads") include service-related costs such as administration, computer and personnel department, customer related costs such as the sales department, maintenance and deliveries, etc. The program refers to these activities as cost pools. In smaller organizations one or two people may carry out the activities; in large organizations there may be several departments or divisions that are responsible for services. Proper costing and cost management requires that the cost pools or overheads be allocated in a meaningful way to the products or services (cost objects) of the organization.

 

 


Cost driver

 

 

The cost driver is the key to allocating the costs in the cost pools to the cost objects.

 

Example: consider the delivery cost pool. The costs in the delivery pool include the truck drivers' wages, fuel, depreciation of the truck, insurance, etc. A cost driver is designed to allocate the delivery cost pool to the cost objects. For example, the cost driver could be on the basis of sales amount per cost object. Or it may be more appropriate to use the number of deliveries as the cost driver. The software has the facility to enter and change the cost drivers as better information becomes available.

 

Traditional techniques tend to give wrong costings because they use simple methods to allocate cost to products – for example direct labor or revenue is often used to allocate all overheads to products. This can lead to some products being penalized because of the unfair basis of allocation chosen. A result of bad costing information can be management taking wrong business decisions and losing business. Activity based costing avoids such distortions because realistic cost drivers are assigned individually to each cost pool. Activities can be controlled, wastage can be measured and reduced, unused capacity can be measured and managed, costs can be assigned to products and services based on their "true" consumption of resources. Executives understand the costs triggered by the cost objects and can manage them.

 

Traditional costing allocates overheads on the basis of arbitrary allocations and is often completely distorted. Activity based costing allocates costs on the organization's best estimate of the appropriate cost drivers and involves many value judgments. The costings produced by ABC will be more realistic because all of the resources are assigned to the cost objects in a considered way.

 

 

Conclusion

 

 

ABC Focus crystallizes the techniques of activity based costing. It is an easy to use software program that organizes and manages the costing processes. Use it to cost the services you deliver or the products you make or sell. Help you to focus on the correct markets, customers, services and products.