For years, practitioners of activity-based costing (“ABC”) have struggled to institutionalize the concepts. Those that have seriously embraced sustainable ABC have eventually hit a wall, finding that the high cost of both implementation and maintenance exceed the benefits.
What is the problem with this important business concept? Simply stated, traditional ABC uses a top-down approach to push costs from resources, through activities, to cost objects. This approach is problematic for two reasons – process complexity and business dynamics.
- Process Complexity: Traditional ABC decomposes business processes into activities and tasks to differentiate complexity factors (new vs. existing customers, standard vs. rush orders, etc.). The more business processes are decomposed, the harder it becomes to accurately link resources to activities and tasks.
- Business Dynamics: Traditional ABC links resources to processes with a snapshot in time, generally surveys. Dynamic business processes require frequent surveys, which are disruptive and costly. Furthermore, surveys are not accurate because they are based on individual perceptions of the time spent executing activities and tasks.