ABC analysis (Activity Based Costing)
ABC is a cost accounting method in which indirect costs are divided and calculated by activity with each criterion of activities. Activity-based costing.
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Overview
ABC is one of management accounting methods. In ABC ,business processes are divided into activities and indirect costs are distributed into each activity with particular criteria. The accurate distribution of indirect cost provides accurate cost accounting. ABC was proposed by Professor Robert Kaplan at Harvard University in 80's.
The result of ABC enables us to analyze which activities cost a lot and reduce costs based on the analysis. The method to improve operational efficiency by analyzing the result of ABC is called ABM(Activity Based Management).
Procedure
The procedure of ABC is given as follows.
- Define business processes clearly and divide them into activities.
- Fix cost drivers that determine the amount of costs activity by activity.
- Distribute costs to each activity in accordance to the cost drivers.
- Compare the result with a strategy or plan and analyze it.
Background of usage
Indirect costs are sharing more in the whole costs because of employment costs of business department and administration department and maintenance and operation costs of IT system. The more indirect costs share in the whole costs , the less efficient the cost accounting method of the average distribution of costs is. To deal with this problem and ensure the accuracy, ABC was introduced.
ABC is introducing actively to the cost management in nonmanufacturing in which the percent of indirect costs is high.
Introduction to BPM
In the concept of ABC ,business processes are defined clearly and divided into activities and then ,the costs of processes are calculated by activity unit. This sort of process-oriented method is more useful in BPM than other methods. The merits of introducing of ABC and BPM are given as follows.
Detection of inefficient points in processes
The calculation of cost by activity unit enables us to detect the inefficient points in a process. To focus resources of improvement on the inefficient points is more accurate and less risky to calculate the cost by process unit and restructure the whole process.
Setting of appropriate KPIs activity by activity
The calculation of cost by activity unit enables us to set detailed KPIs as an indicator to figure out progress of process operation. Through the monitoring with detailed KPI, a problem in a process operation can be figured out in early stages if it occurs. ABC enhances the effect of BPM.
