activity-based costing

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Definition

Activity-based costing (ABC) is accounting procedures that can quantify the real profitability of different activities by identifying their actual events.

 

Activity-Based Costing in Marketing

Originating with George Staubus, an accounting professor at UC Berkley, activity-based costing (ABC) was rooted in the manufacturing industry during the late 1970’s and early 1980’s. Since then, the practice of activity-based costing has grown to cover other disciplines, including marketing where ABC is an accounting tool used to conduct customer profitability analysis.

In marketing, ABC seeks to determine the real cost of serving customers. Activity-based costing takes into account fixed, variable, and overhead costs.

In traditional cost accounting, a firm will look at only the costs of what it takes to accomplish something. As an example, in a business-to-business service transaction, traditional cost accounting only accounts for the price of the services rendered. In ABC, all costs associated with the service are calculated to determine the actual value and profit of the service.

For example, ABC looks at the time to communicate with the customer via the phone or social media, the amount of travel time for the sales associate between the firm and customer, administrative costs, office expenses, and so on. Businesses that fail to take into account all costs via activity-based costing fail to measure actual profit and are likely to misallocate their marketing effort.

 

Implementing Activity-Based Costing

The goal of achieving an ABC system as a tool for managing overhead costs and profitability in marketing is to generate useful numbers that help you think more clearly and creatively about your business.

Below are suggestions for implementing a basic activity-based cost system from the Dummies.com website. For more in-depth ABC systems, check out these sources.

  1. Make sure you need to implement an activity-based cost system. Verify that you have enough overhead that ABC makes sense for you. If you are in business with high margins and little costs, ABC may not be right for your firm.
  2. Identify overhead costs. Focus on significant costs to your business. If you have insignificant costs; you may want to ignore these unless they are simple to calculate.
  3. Identify the main activities that consume your overhead costs. Keep your accounting simplified by identifying a handful of events that accurately measure your overhead costs. Remember, you are looking for the big picture of your expenses.
  4. Connect activities to products with proper measures. After identifying the activities that consume your overhead costs (see #2 above) connect those events to the products or services offered. By doing this, you can identify which activities are tied to which products and services and determine the actual costs of producing them.
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