What is ABC and How Can You Adopt it In Your Business?

Activity based costing or ABC is a method that numerous accountants are familiar with. It allots manufacturing overhead costs to items in a more sensible manner. It first allocates costs to tasks that trigger an overhead cost. ABC acknowledges that all activities that trigger costs during the manufacturing process make the company spend its resources. That’s why a business using ABC method will calculate the cost of resources consumed in each activity. Additionally, the cost of every activity will be allotted only to items that required it. ABC is trending these days as a result of these reasons:

  • Ever increasing costs of manufacturing overhead costs
  • There is no more correlation between manufacturing overhead costs and either direct labor hours or machine hours.
  • Customer demand has advanced and more diverse products keep on being made to meet it
  • Certain types of products are made in bulk and others are made in small amounts.

History

It was developed in the beginning of 1980s by Robert Kaplan, a professor in Harvard Business School. Although it was largely used then, ABC was almost dormant in the next decade. It was probably because users could not turn theoretical content into action; so, many companies continued to use their conventional costing approach. In 2007, however, the same professor brought a book (TDABC) that explained the concept in a way that could be understood by ordinary users.

Benefits

ABC is a method of accounting that is preventing numerous manufacturers from making loses. Those who continue to use the traditional accounting approach risk making losses, though, as the method is considered unacceptable and biased now. It allots business overheads or indirect costs according to an activity’s direct costs. Even if two manufacturing activities generate similar direct costs, they can trigger totally different overhead costs. This cost difference, no matter how trivial, would not be recognized by the traditional costing method. That’s why activity based costing makes more sense and has become a more preferred costing system these days.

Implementation

ABC sounds great, yet it is quite hard to adopt. It requires all business tasks to be fragmented and separated. A clever accountant has to figure out how to break down every activity in to small, distinct parts. As the process is intricate, more caution should be observed by larger businesses. A trial project would prevent a big organization from wasting time and money. Additionally, large companies can benefit from outsourcing the project to a qualified third party.

If this doesn’t seem like a good solution, it would be prudent to use ABC software. This software should be integrated with your current accounting system. This may sound difficult or infeasible, but it’s not if you pick the right accounting software program. There are several options on the internet, but we would strongly suggest Anaplan. It is a cloud-based platform with excellent apps for supporting different business functions and processes. An app for ABC is available on Anaplan.com. All you need to do is to visit the site and learn more about this special app.

You already know that apps simplify how we do business and hasten processes that could otherwise be too slow and boring. Anaplan.com gives an ABC app that could be accessed from anywhere and on your mobile internet-enabled gadget. Do not hesitate to use it as your number one ABC implementation method. So far there are companies that cannot let go of this method. You should try it too and make it even more understandable with Anaplan software. If you have pressing questions, feel free to get in touch with the company’s customer care department. Someone will respond quickly and explain why activity based costing software is more beneficial and practical these days.