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Why should I consider activity-based costing?
July 24, 2007
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Question: We operate a large inplant print shop, using PSI for our management system. We’ve been using budgeted hourly rates (BHR) for figuring charges to our customers. All time and materials are entered by the operators, with any buyouts entered by office personnel. We do not markup materials or buyout services. Recently, someone has suggested that we switch to activity-based costing (ABC). It appears that it would take a lot of time and effort to set up ABC, with the cost of doing so far outweighing the benefit. What are your thoughts?
Dean Sutera, FredMeyer/Kroger
Answer: The short answer is that ABC provides much more accurate cost information than traditional budgeted hourly cost rates (BHRs). BHRs implicitly assume that all jobs consume indirect costs (overhead) in the same proportion that they create or consume direct manufacturing costs. And in most cases, that is simply not the case. Therefore, traditional BHRs significantly distort or misrepresent the real costs many jobs or services.
The ABCs of ABC
Would your organization benefit from ABC? That depends on how you would answer several questions. Do you manufacture a wide variety of printed products? Do you offer significant non-print services? Do your customers vary significantly in their knowledge of the printing process or in the demands (estimating, customer service, etc.) they place on your organization? Is the accuracy of the charges to your customers important to your organization?
Diversity Is Key
The value of activity-based costing is driven primarily by diversity. The more diverse your operations and/or customers are, the more valuable ABC will be to your organization.
The time and effort required to set up an ABC system are not insignificant, but neither are they overwhelming. In many ways, activity-based costing is simply an extension of your BHR-based costing system. You would be able to continue using your PSI print management system, and the benefits of ABC could be substantial.
Posted by Mark Vruno on July 24, 2007 | Comments (0)
