Through traditional costing methods there is a high probability that some products will receive more costs than they should. This is because there is no clear distinction between the activities that generate the cost and the products associated with it. Activity Based Costing (ABC) was created to identify key differences in cost–creation activities and to more accurately allocate costs to their cost driver (Kinsella, 2002, p. 52). There are major benefits associated with using an ABC system, so why don’t more companies use it? Straight-forward in theory, ABC proved more difficult to put into practice. Instead of gaining more ground with companies, ABC fell to the wayside, because most companies viewed it as extremely cumbersome. Once at the top of Bain’s List for management tools, it has now fallen to the 22nd slot (Easier than ABC, 2003, p. 1). Now with the economy at an all time low, companies are re-examining ABC to see if it can help them to align the activities with the cost they produce. For a company to succeed with ABC they need to look at the companies who have implemented an ABC system successfully, those who have been unsuccessful with ABC, and try to make a determination if an ABC system is right for their com
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This made these systems a nuisance to maintain and most companies abandoned them before they reaped any benefits from the system (Triplett, 2003, p.
The same goes for client profitability, if you know who the winners and losers are in your customer base you can make sure that the profitable customers stay satisfied.
Most of the early failures of ABC can be attributed to having to manually update it. The customers that are most widely looked at are the AD customers, those contributing most of the volume but very little profit (Triplett, 2003, p. This was usually a hit and miss type analysis. 21)
Benchmarking is simple once you have your ABC system in place. To create a costing system that will give you what you need to effectively manage cost, ABC is the tool to use. This helped managers to understand what their cost drivers were and what drove their profitability. One of the best ways to handle this is to initiate a pilot project (as mentioned above) to get an idea of the cost involved for a company wide setup. In this system A represents the best and D represents their losers.
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