ACTIVITY-BASED COSTING

Activity-based costing (ABC) is an accounting
method that allows businesses to gather data about
their operating costs. Costs are assigned to specific
activities—such as planning, engineering, or manufacturing—
and then the activities are associated with
different products or services. In this way, the ABC
method enables a business to decide which products,
services, and resources are increasing their profitability,
and which are contributing to losses.
Managers are
then able to generate data to create a better budget and
gain a greater overall understanding of the expenses
that are required to keep the company running
smoothly. Generally, activity-based costing is most
effective when used over a long period of time, as
opposed to shorter-term solutions such as the theory
of constraints (TOC).
Activity-based costing first gained notoriety in
the early 1980s. It emerged as a logical alternative to
traditional cost management systems that tended to
produce insufficient results when it came to allocating
costs. Harvard Business School Professor Robert S.
Kaplan was an early advocate of the ABC system.
While mainly used for private businesses, ABC has
recently been used in public forums, such as those that
measure government efficiency.