Activity based costing
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ABC system
Far from new, Activity-Based Costing first surfaced as various commercial businesses began to experience difficulties in accounting for indirect and overhead costs. ABC solved this problem by directly tracing overhead costs to the processes that generate products (or outputs). By providing accurate cost measures, ABC has helped improve product costing, strategic pricing, and profit planning.
ABC is not really new to the public sector either. In the late 1940s, Government Performance Budgeting was first introduced to the federal government, an idea based on activity-based (or unit cost) resourcing principles. Many combat activities within DoD have been managing with cost-per-unit measures for some time. For instance, Air Force units that fly aircraft manage in "cost per flying hour." The Navy manages in "cost per steaming hour," and the Army in "cost per tank mile."
A powerful tool for measuring performance, Activity-Based Costing is used to identify, describe, assign costs to, and report on agency operations. A more accurate cost management system than traditional cost accounting, ABC identifies opportunities to improve business process effectiveness and efficiency by determining the "true" cost of a product or service...