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Activity-Based Costing Advantages & Disadvantages

How many of you have implemented ABC?

Were you successful? What were the Advantages over traditional costing you reaped? What were the Disadvantages that were a by-product of the implementation? Would you use it again??


Lawrence Caffrey
Title: Bookkeeper
Company: SES Foam
(Bookkeeper, SES Foam) |

I did a study for a die casting operation that allocated all costs based on machine hours, ignoring labor and set-up time. It was an in house operation and they made small runs for older outboard motors as "needed". As you might guess, they often had 15 hours of set up time for a one or two hour run - significantly understating costs of these inventory items.

At a large consumer manufacturing operation they allocated overhead, including depreciation based on labor hours. They spent a few million on a automated production line for a high volume product, significantly reducing labor hours. The results were allocating the depreciation costs of the new line to the lower volume products, overstating the costs of these products and understating the costs of the high volume product. The profitability based on margins was misstated.

I am a evangelist for ABC, though not the ABC of complexity. Douglas Hicks wrote a great book "Activity Based Costing" Making It Work For Small and Mid-Sized Companies" which is the best reference document I have read. I have often quoted a line from his first edition "It is better to be reasonably accurate than precisely wrong." I have seen costs calculated to multiple decimals, but the costs were wrong based on the simplistic allocation factor(s) used.

Topic Expert
Wayne Spivak
Title: President & CFO
LinkedIn Profile
(President & CFO, |

When I use to set up MRP systems, we created BOM's with average setup time built in. Each step also had an average work time.

Depending on the sophistication of the manufacturer, we either used a "standard" labor cost or a full-fledged labor application methodology. Either way, I think we lived up to that quote "It is better to be reasonably accurate than precisely wrong."

Allen Vail
Title: VP Finance & Operations
Company: Omron Electronics
(VP Finance & Operations, Omron Electronics ) |

Good discussion points from all. Thanks for reference to Hick's book.
I've always had an interest in ABC and had some experience with it in the manufacturing sector. A company that really knows it's cost drivers has a competitive advantage (my opinion is most companies really don't know).
I'm now in a distribution environment and see benefits of applying.
Quantifying transactional cost of functional areas (eg. customer care, logistics, supply chain, etc) can help highlight the cost of inefficient processes and real profitability by customer.
Looking for feedback from anyone who has applied ABC in this sector.

Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

Have you been able to identify the cost drivers and then collect data on them to support ABC?
What help do you get from your CRM/ERP systems re this data and are you using an ABC software package to determine true costs?


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