Activity Based Costing (ABC) History of Activ

One of the more astute observers of ABC trends and techniques, Paul Sharman, describes the concept thus. "An approach known as activitybased costing (ABC) can provide management with relatively accurate overhead attribution to product cost and therefore a better understanding of profitability. ABC also provides cost information on major activities undertaken by the business as well as the cost of business processes, all of which can be captured in a comprehensive cost model relatively cheaply" (Sharman, 1992, 13).

Let us consider a typical example that will clarify the power of ABC. Assume as a model that there is a production line, in which a component, "E," is assembled from four other components, A,B,C, and D, and two workers are assigned to the station. In the pre-ABC accounting concepts, the accountant would consider the cost of labor times a 40-hour week and the divide that figure by the cost

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e taxing when you consider functions such as purchasing, business systems, materials planning, human resource functions, and accounting. The way to think about solving the problem, however, is with a simple rule: cost activities, not products" (Sharman, 1992, 15). Traditional cost systems err in assuming that overhead activities are consumed equally by all products relative to volume produced (Goulden & Rawlings, 1997). They further err in assigning all costs to all products, relying on a dated concept that current output is the prime consideration in current overhead costs. Sharman says that "conventional thinking holds that the inaccuracy is not relevant because in total all costs are accounted for, and on average the relative distortion in margin reporting can not be significant" (Sharman, 1997, 14). In greatly simplified terms, ABC divides overhead costs into two categories: "business sustaining" and "business producing." An example would be a software company that manufactures a certain product. The actual software  the codes and the interfaces  is provided by engineers and programmers, who are, in this case, the "business producers." Yet without overhead assigned to the business "sustainers" (marketing, ship
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Approximate Pages = 5 (250 words per page)