Is ABC Suitable for

Your Company ?
By :
Pratiwi Bestari
Ratu Shavira
Rayhan Zuhra Rinaldi
 ABC stands for Activity Based Costing

Activity-based costing (ABC) is a costing

methodology that identifies activities in an
organization and assigns the cost of each activity
with resources to all products and services according
Still Remember to the actual consumption by each.
What is ABC ?
This model assigns more indirect cost
(overhead) into direct costs compared to
conventional costing.

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Is ABC suitable for your company
?
What is the objective way to decide ?

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How To Make ABC be effective ?

A majority of all costs incurred by a significant

unit of a business must be analyzed systematically .

Those cost is not include not only fixed and

variable factory burden costs, but also some fixed
and variable marketing and administrative costs.
Actually, Implementation of ABC is requires a
complex , comprehensive process that is costly and
time consuming.
So, Managers should be assured of the
advantages before embarking on the implemation
ABC
 1. Number and diversity of product and
services produced
2. Diversity and differential degree of
Factors support services used for different
products
involved in 3. The extent to which common or joint
first processes are used
dimension 4. The effectiveness of current cost
allocation methods
5. The rate of growth of period costs

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 1. Management’s freedom to set prices
Factors 2. The ratio of the period costs to total costs

involved in 3. Strategic consideration

4. Climate and culture of cost reduction in
second company
dimension 5. Frequency of analysis that is desirable or
necessary

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 Based on a company’s analysis of itself. Consist of weighting
and combining the weights of the above factors and dimension.
To start management must analyze the nature of the
company in light of responses to two key question :
A contingency
1. For a given organization, is it likely that ABC will produce costs
approach to that are significanly different from those that are generated with
implementing Conventional Accounting, and does it seems likely that those costs
will be “better” ?
ABC 2. If information that is considered “better” is generated by the new
system, will the new information change the dependent decisions
made by the management ?

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 Basic Potential for ABC Based on Cost Distortions
1. Product Diversity
Quantity or range of distinct product or the variety
of product families offered.
For example :
How to find It is unlikely that 20cm diameter ball bearings
the are a different product offering from 21 cm diameter
of ball bearing.
answer ? Differences in the complexity of various
products also should be reflected in this analysis.
“ Products that appear relatively homogenous but
that vary greatly in complexity are indicative
of high diversity “

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 Basic Potential for ABC Based on Cost Distortions
1. Product Diversity
There are numerous considerations in evaluating
the extent and degree of product diversity :
How to find 2. Accounting product classification
the 3. Market served

answer ? 4. Stockrooms
5. Sales
6. Advertising

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 Basic Potential for ABC Based on Cost Distortions
2. Suppport Diversity ( SD )
Range or variation of support overhead given
to product. Asumption can’t be based on size. Even
if the organization is only a cost center or
How to find production facility, if it has more than one basic
product support requirements probably exist.
the
answer ? “ A superficial look at the organization may
indicate little diversity, but a closer
examination may reveal that actual
activities vary greatly by product “

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 Basic Potential for ABC Based on Cost Distortions
3. Common Process ( CP )
Degree of commonality of process
among the different product offering. “Processes”
encompass all identifiable activities including
manufacturing, engineering,marketing, distribution,
How to find accounting, material handling, quality control,
research and development.
the if there is a high degree of commonality of
answer ? process or activities among products, period costs
required by each product cannot be separated using
conventional management accounting.

ABC may be more EFFECTIVE

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 Basic Potential for ABC Based on Cost Distortions
4. Cost Allocation ( CA )
Existing consting system’s conceptual ability
to allocate period cost properly. In essence, period
cost allocation methodology to determine if its
How to find capable of mimicking the results of ABC.

the Major focus of ABC analysis is on associating

period costs with products. ABC also suggest that
answer ? many non manufacturing costs, such as marketing
costs, also are a function of product activity and
should be loaded in the products responsible for
their incurrance.

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 Basic Potential for ABC Based on Cost Distortions
5. Rate of growth of period costs (PG)
Growth in period as an indicator of the
dynamism required by the costing system.
How to find
the One of ABC’s strength is its ability to capture
changes in the support requirements of products
answer ? quickly through its direct measurement of activity
levels.

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 How Does Management Use Cost Information in
Decisions?
1. Pricing Freedom (PF)
Pricing freedom refers to the company’s degree of
power and freedom to set prices and therefore establish
How to find product profitability.

the 2. Period Expense Ratio (FE)

Period expense ratio addresses the possible
answer ? materiality of product cost distortions directly.

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 How Does Management Use Cost Information in
Decisions?
3. Strategic Consideration (SC)
Strategic considerations refer to the constraints
imposed upon management’s decisions by its explicit or
implicit strategies.
How to find 4. Cost Reduction (CR)
the Cost reduction involves the corporate culture as it
affects the relationship between internal cost-related
answer ? decisions and the indirect component of the total cost of
product.

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 How Does Management Use Cost Information in
Decisions?
5. Analysis Frequency (AF)
Analysis frequency refers to the frequency, either
How to find routine or special, of product cost analyses and
incorporates both the current and the desired
the frequencies.

answer ?

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Thank You

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