In today's fast-paced and fast-changing business world, keeping up with the competition can be difficult. A surefire way to keep your business moving forward is to implement new accounting methods that give you more insight into costs and performance. Activity-based costing (ABC) is one such method that provides a detailed breakdown of the costs associated with individual activities, also known as cost drivers. Read on to learn more about ABC and how it can help you optimize your business operations.

What is Activity Based Costing? < / p>

Activity-based costing (ABC) is a method used to calculate the cost of goods sold, inventory, or other business expenses. ABC is also sometimes referred to as a cost flow assumption. ABC uses a detailed breakdown of activities and related costs to more accurately determine the cost of a product or service. ABC calculates the cost of activities within the organization and then allocates those costs to products or services based on usage. This allows companies to obtain a detailed breakdown of the factors that determine costs. For example, ABC can help companies understand why a certain product or service is more or less expensive to produce. Generally speaking, ABC is often used to calculate cost of sales, but it can also be used to calculate other expenses, such as inventory and operating expenses.

Why you should be interested in calculating costs. cost per activity

The main advantage of ABC is that it provides much more detail than traditional costing systems. Traditional costing systems use a "brute force" approach, where costs are assigned to cost centers or companies based on headcount or other general measures. The ABC, on the other hand, is much more complex. It examines the specific activities that generate costs and assigns them to cost centers or products based on the usage of the activities. By using the ABCs, you will be able to get a much more detailed breakdown of your costs. This will help you make more informed decisions about your business and identify potential areas for improvement. If a particular business increases the cost of your products, for example, you can find ways to reduce it to make your products more competitive. Similarly, if one product costs more than another to produce, steps can be taken to reduce its cost.

How to implement activity-based costing

There are three basic steps in implementing ABC:

Define the activities: First, you need to define the activities that determine the costs. These can be of any type, from design to production, from marketing to shipping. The more detailed the list of activities, the more accurate the ABC calculations will be.

Identify the costs of each activity: Next, assign a cost to each activity. This will likely require some research and interviews with the employees involved in each activity.

Assign costs to products based on use: finally, assign the costs of each activity to each product or service based on the use made of it.

Note: Depending on your company, you may also need to assign overhead costs to each product or service.

3 steps to implement ABC

If implemented correctly, ABC will help you gain new insights into your business that you would not be able to get with traditional computing systems. Here are three ways ABC can help you:

  1. Collect data on product costs: ABC starts with product costs; therefore, you will first have to understand how much the production of each product costs. To do this, you can look at the existing cost of sales and add any other costs associated with making that product.
  2. Collect data on activities: You then collect data on the activities of your company. These include the resources that each activity consumes and the costs of those resources.
  3. Calculate the cost of each activity: Once you have the data on the activities, you can use them to calculate the cost of each activity.

2 challenges of the 'ABC

As with any accounting method, activity-based costing also has limitations. Here are two potential challenges associated with ABC:

  1. ABC requires careful collection of the data needed to calculate costs. You will first need to identify all the activities associated with the production of each product or service and then assign a cost to each activity.
  2. Investing in technology is recommended: to implement ABC you will probably need to invest in software, such as example a cloud-based accounting system.

The Wisdrome solution? It's called EXECUT

Do you want a tool that allows you to earn more by understanding what affects your profitability?

EXECUT, Wisdrome's ABC software, is a calculator for entrepreneurs that allows you to calculate the cost of all business activities, see your company as a set of measurable assets and resources, and track of the performance of your company using the sophisticated ABC method.

With EXECUT, you can do all this in real time, translating the activities of your business into costs and interpreting the company as a set of activities and resources measurable with an intuitive tool for real-time performance monitoring.

You will be followed by our Activity Based Costing professionals, with a view to collaborative management. These experts will pass on their know-how on the subject and take care of collecting the necessary data.

Thanks to Execut you will have the opportunity to significantly increase the profits of your company!

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