Home / ABC Cost Model

ABC Cost Model

Share on Facebook Share on Twitter Share on LinkedIn

The ABC (Activity Based Costing) cost model is used in cost accounting and distributes the costs according to the activities carried out in the company. The ABC system or model is based on the fact that it's the activities that consume resources and generate costs.

In an ABC model, the company's activities involve costs, that is, they consume resources and for this, this system uses physical and monetary indicators. It should be noted that the advancement of information technology at the service of the company has allowed the evolution towards new cost accounting models such as ABC. The ABC system allows monetary and non-monetary measures to be carried out that'll offer a more complete view of the company's costs and allow better use of resources.

The ABC cost method assumes a split variation of the total cost model, which indicates that absolutely all costs must be allocated and distributed among the products. This method appears in the mid-80s by Cooper Robin and Kaplan Robert and is considered one of the most reliable when you have to allocate costs to activities.

The activities in the ABC model

The first task of every company when implementing the ABC system is to identify the activities that are carried out in the company, because as we have said before, these will be the ones that consume resources.

We can classify the activities as follows:

- Main activities: Those that are directly related to the purpose of the company. You can't consider eliminating your direct control.
- Secondary activities: They are those that generate added value from the client's point of view, however, they involve too many costs for the company to assume, so they can be subcontracted.

In this way, you can know the amount of resources used by each activity and analyze the cost of this activity in the product. The ABC system or method offers:

- An extension of the conception of the management, control and analysis of the costs, paying special attention to the planning and design of the product,
- Measures of quality and delivery times, flexibility, innovation and after-sales service and discerning to a large extent the traditional, more archaic and few cost systems developed against it.
- In the case of the base of activity costs, a more detailed and detailed analysis of the resources used is achieved, a more general vision than traditional systems.

Cost sharing through inductors

Once the tasks that are carried out within the company have been defined, it'll be necessary to determine how the costs are distributed among the activities. This is where the inductors appear, which are the factors that influence the level of consumption of the different activities.

We found three kinds of inductors:

- Transaction inductors: The number of times an activity is repeated must be taken into account to calculate the average cost per activity.
- Inductors of duration: Time needed to perform each activity.
- Intensity inductors: Resources consumed each time the activity is carried out.

Analysis Oriented System

The ABC system is more complex and difficult to implement than others, but it's certainly a great element of analysis from which to obtain information for decision-making and evaluation of activities and actions in relation to the product. The ABC method makes a big difference with respect to other more traditional cost quantification systems as emphasis is placed on the cost of the activities. While other cost control systems focus on materials, the ABC model places great emphasis on the added value that activities bring to the product.

See also:
Back to top

Home | About Us | Contact | Privacy Policy | Terms of Use

Copyright 2011 - 2019 - All Rights Reserved