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What is the preferred alternative to Activity Based Costing?

Carol Johnson's Profile

Activity Based Costing vs Traditional Costing


Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

I do not see a preferable alternative. There is a tremendous benefit to understanding the cost required to generate revenues for each discreet service or product. The real question is how to perform an abridged ABC analysis. Two alternatives - undertake the analysis annually and use the information derived until updated; or only look at variable components, I.e. change in commissions and marketing dollars to generate revenue. While there is always value in understanding the current situation, this data adds the most value trended.

Mike Poe
Title: CFO
Company: XinRay Systems Inc
(CFO, XinRay Systems Inc) |

Implementation of Lean Thinking methodologies is a much better alternative than ABC. Lean is a body of knowledge encompassing the systematic identification and elimination of waste. By eliminating most or all waste in a process, the resulting process approaches an optimum process. Defining an optimum process is difficult, but fixing wasteful processes is relatively easy. Lean originated in manufacturing but can be applied to administrative, financial and other non-manufacturing processes.

I've been through ABC and Lean, and Lean produces far better results. ABC is an analytical exercise that consumes a lot of time. It may identify areas for improvement but doesn’t necessarily identify ways to make the needed improvements. Lean identifies wasteful activities and the means for eliminating them is often readily apparent, so Lean usually results in quick and lasting results. Lean also involves most or all employees in the company, which means that most of the company ends up being trained in the recognition and elimination of waste, which helps to perpetuate continuous improvement.

If you don’t have expertise in the company familiar with Lean methodologies, you will have to hire it via experienced employees or consultants. Successful implementations require active and continuing commitment from senior management and the board. But the productivity and financial results are far better than for ABC.

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

So for us "older" folks, a combination of Gap Analysis, TQM and MBO :)

(Agent, JKS Solutions, Inc.) |

You are probably already doing ABC and don't even realize it.

When you assign your costs to specific cost centers, that's ABC. Eliminating all allocations and OH to Admin departments is true ABC.

The only way to ensure your org is accountable is through some form of ABC.

Reed Kingston
Title: Managing Director
Company: StrataFusion
(Managing Director, StrataFusion) |

Carol, all of the answers provided so far might be right--even when they contradict each other.

What are you using ABC for? The term and techniques have been used to describe process improvement approaches (hence the comparison to Lean) in addition to being used as a financial analysis/decision support/product costing framework that may or may not be used for inventory valuation and financial reporting.


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