LS0980: Activity-based costing (ABC)

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Question: Activity-based costing (ABC)
has helped many companies for decades gain a true understanding of their costs to produce and distribute products to customers. ABC provides a precise,
accurate view of costs at very granular levels-namely, at the individual product, service and customer level. Successes during the 1980s in applying ABC methods to manufacturing prompted an eventual expansion of this methodology to other key components of the supply chain (e.g., distribution). Manufacturers such as Proctor and Gamble and Warner-Lambert began using ABC models to determine their overall costs to serve individual customers (e.g., Walmart),
and to evaluate the costs of offering different individual services to customers (e.g., services such as vendor-managed inventory and advanced shipment notices, or ASNs). (Source: Miller, B. T. The ABCs of Activity-Based Costing for Logistics.)

a. What is ABC and how is it different from the traditional costing methods?

b. Using suitable examples, explain the important factors for selecting the cost drivers in ABC.


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