ACTIVITY-BASED COSTING AND ITS RELATIONSHIP TO
Activity-Based Costing is a set of systems that a manager can use to trace historical costs (resources consumed) to activities and then, through those activities, to products or services provided (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).
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. Activities are named 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. There is another term to be considered. "Service Based Costs," or SBC. A Service Based Cost is the cost of all the activities performed to provide that service. Services consume activities, and activities consume resources.
ABC can best be understood by thinking of its relation to systems Activity-Based Costing. As defined by the Council of Activity-Based Costing Management, "Activity-based Activity-Based Costing is the process of planning, implementing, and controlling the efficient, effective flow, and storage of goods, services, and related information from point of origin to point of consumption for the purpose of conforming to customer requirements" (Minahan, 1996, 48). By extension, then, ABC is concise implementation of macro-and-micro management techniques that are designed to ensure that products are delivered on time and on budget.
In today's marketplace, the importance of effective ABC management to achieve excellence cannot be ignored...