Activity Based Costing
Activity based costing or “ABC” compared to traditional costing is a decision making tool which provides our clients more accurate cost and profit information and allows decision makers to understand the cost and profit drivers that can be influenced to improve their business.
We can create a virtual cost model of our clients / suppliers factory to calculate accurate hourly rates – which is the important foundation step in our cost engineering / cost reduction activities. The ABC hourly rates generated for our clients factory will ensure they quote new business at profitable levels by taking into account economic, market and customer driven risk factors. Also their business decisions are based on robust numbers e.g. when they check profitability of existing business using accurate hourly rates and take a bottom up costing approach.
The ABC hourly rates calculated for suppliers factory can be used to ensure our client pays the optimum price for purchased goods and services.
After we create a virtaul cost model using ABC method:
- our clients business decisions are then supported by robust numbers
- we can perform various scenario modelling e.g. ‘what if’, make v buy, what is the best location?
A machining company asked us to calculate their hourly rates using the ABC method.
They were using a blanket overhead rate for all of their machines.
The ABC rates we calculated showed they were over charging on some machines while under charging on others.
Therefore, their profitability was affected by significant product mix changes!