Activity-Based Costing and its Relationship to
Activity-Based Costing refers to the set of value-added or adjusted accounting concepts and systems that certain managers have adopted as a method to trace historical costs (resources consumed) to activities and then, through those activities, to products or services provided (Sharman, 1994; Tavana & Rappaport, 1997, 307). ABC allows local managers to develop activities for their cost needs while simultaneously generating service or process costs. The advantage of the detail in ABC for the manager is to give visibility to value added and non-value activities (Masters, Allenby, La Londe, & Maltz, 1992, 47; Rose, 1991).
To Daly (2001),ABC is a technique to quantitatively measure the cost and performance of activities, resources and cost objects, including when appropriate, overhead. ABC captures organizational costs for the factors of production and administrative expenses, and applies them to the defined activity structure. Minahan (1996) points out that the application can be as rigorous as a definite mathematical distribution or as creative as a selective assignment using a surrogate indicator. Regardless of the method, ABC is a process of simplifying and clarifying decisions required by the process evaluators and senior management using activity costs rather than gross allocations(Johnson 1995).
Within this framework, are further sub-definitions. "Activities," for example, are what people do to accomplish work, whether the end result is a good or a service" (Sharman, 1994, 17). Activities, according to Daly (2001) can be identified with a verb and direct object, e.g. "pack boxes," "unload inventory," "assemble golf clubs" and so on. Activity Based Costing analyzes these "activities" to determine ratios between activity unit costs and activity volumes. For example, some companies simply refer to "shipping" as an expense, whereas a company that is using ABC will consider "sh...