Activity Based Costing:

• assigns resources (costs) to an organizations activities
• calculates activity unit cost where appropriate
• assigns activities and their costs to
  • products
  • services
  • customers
  • channels
  • divisions and subsidiaries Transfer Pricing
  • locations
  • Shared Services (e.g. HR supports purchasing)

Activity Based Costing was founded by a consortium of large Fortune 500 companies called CAM-I in the mid 1980"s. These companies wants to find a better way to cost their products and services.

The consortium of companies build on some of the work done in the early 1900's to focus on costing activities. The need for better costing arose when the distribution of costs among materials, direct labor, and overhead. In the middle of the last century, direct labor might be 35% of total manufacturing costs and manufacturing overhead might be 15% of total manufacturing costs. By the 1980s these percentages were flipped.

1960s            1985

15%               35%     Overhead

35%               15%     Direct labor

50%               50%     Direct Materials

100%            100%   Total manufacturing Costs

In this changing environment, applying overhead of 15% on 35% direct labor may have made sense. However, today, direct labor has been automated so that applying 35% of overhead on 15% direct labor causes distortions.

By clicking on the links to your left, you will gain more insights into Activity Based Costing.

Call or email below John Antos or Jim Brimson at 972-980-7407 to find out how we can help you reach your goals with Activity Based Costing and give you peace of mind.