In recent years, activity-based cost (ABC) accounting has challenged traditional accounting methods as the preferred method for internal reporting (Stratton, May 1993, p. 44). Some companies have incorporated ABC to provide external accounting reports, as well. This increase in the popularity of a relatively new technique suggests that the accounting profession as a whole and companies across the business spectrum are recognizing that ABC can offer increased benefits to those organizations willing to take the time to implement ABC systems. This research explores ABC techniques, how ABC compares to traditional accounting methods, and considers the environments where ABC can effectively be implemented.
Activity-based costing focuses on capacity and expenses at the micro, not macro, level of a company's operations. ABC recognizes that products are not the same and that the level of effort required to produce different products varies with the products themselves. Activities consume resources; products consume activities (Yang & Wu, May 1993, p. 34). Activity-based costing is based on the premise that activities have to be identified for proper costing. Activity-based costing segregates the expenses of indirect and support resources by activities. These expenses are then assigned based on the drivers of the activities (Cooper & Kaplan, May-June 1991, p. 131). In this way, managers receive information from the ABC method that indicates which activities, rather than which units, are responsible for the cost structure of the organization.
ABC Compared to Traditional Accounting Approaches
Traditional accounting approaches use a volume-based cost system. Simple volume-based costing requires that the company identify the total cost and divide that by the number of units, yielding a per-unit cost. For example, if a company's costs are $600,000 and it produces 160,000 units, its per-unit cost is $3.75 per unit (Yang & Wu, May ...