#Activity based costing analysis drivers
#Activity based costing analysis manual
#Activity based costing analysis series

The two main tasks for the ABC system were to: trace direct labour costs directly to product and client contracts and allocate manufacturing overheads on the basis of up-to-date direct labour hours to contracts. The inaccuracy of the traditional costing information seriously impeded Xu Ji’s ability to compete on pricing.

#Activity based costing analysis series

At this time, Xu Ji underwent a series of flotations following China’s introduction of free market competition. Accounting was driven predominantly by external financial reporting purposes, and inaccuracy of product costs became inevitable.

#Activity based costing analysis manual

A large amount of manual bookkeeping work was involved. Prior to the ABC introduction in 2001, Xu Ji operated a traditional Chinese state-enterprise accounting system. ABC also acts as a catalyst to Xu Ji’s IT developments – first accounting and office computerisation, then ERP implementation. Standardisation was not a common notion in Chinese culture or in place in many Chinese companies. The ABC experience has successfully induced standardisation in their working practices and processes. The Chinese electricity company Xu Ji used ABC to capture direct costs and variable overheads, which were lacking in the state-owned enterprise’s (SOE) traditional costing systems. How Xu Ji achieved standardisation in working practices and processes Not all costs will disappear if a product is discontinued, an example being building occupancy costsĪBC should be implemented by management accountants as they are best placed to manage the process and to ensure benefits realisation It is important not to fall into the trap of thinking ABC costs are relevant for all decisions. Use ABC for pricing and product prioritisation decisions It can obscure the bigger picture or make the firm lose sight of strategic objectives in a quest for small savings ABC provides business managers, as well as the finance function, with the information needed to make value-based decisionsĭo not get caught up in too much attention to detail and control. Get buy-in from the rest of the business. Will the additional information ABC provides result in action that will increase overall profitability? Questions to consider when implementing ABCĭo we fully understand the resource implications of implementing, running and managing ABC?ĭo we have the resources to implement ABC?Ĭan we easily identify all of our activities and costs?ĭo we have sufficient stakeholder buy-in? What will it take to achieve this? It supports performance management techniques such as continuous improvement and scorecards. It also enables improved product and customer profitability analysis. ABC enables effective challenge of operating costs to find better ways of allocating and eliminating overheads.

#Activity based costing analysis drivers

It increases understanding of overheads and cost drivers and makes costly and non-value adding activities more visible, allowing managers to reduce or eliminate them. What benefits does ABC provide?Īctivity-based costing provides a more accurate method of product/service costing, leading to more accurate pricing decisions. In this way, long-term variable overheads, traditionally considered fixed costs, can be traced to products. Traditional absorption costing tends to focus on volume-related drivers, such as labour hours, while activity-based costing also uses transaction-based drivers, such as number of orders received. This provides the business with better information to make value-based and therefore more effective decisions.ĪBC focuses attention on cost drivers, the activities that cause costs to increase. It can be considered as the modern alternative to absorption costing, allowing managers to better understand product and customer net profitability. The latter use cost drivers to attach activity costs to outputs.ĪBC was first defined in the late 1980s by Kaplan and Bruns. Resources are assigned to activities and activities to cost objects. CIMA Official Terminology describes activity-based costing as an approach to the costing and monitoring of activities, which involves tracing resource consumption and costing final outputs.