Activity-Based Costing: Modified Approach

Many companies have found it tedious to maintain their activity-based cost systems. They must re-interview employees and re-estimate resource usage by activities each time the ABC system is updated. Many managers are also uncomfortable with the degree of subjectivity involved in estimating employees’ proportion of time spent on each activity. Recently, an alternative approach has been developed that both simplifies the estimation of an ABC system, enables it to be updated easily whenever changes occur in the structure of the model, and also explicitly incorporates the role of capacity.

The innovation involves estimating the time required to perform a transactional activity. By definition, a transactional driver is used whenever the activity − such as setup machine, issue purchase order, or process customer request − takes about the same amount of time. The new approach estimates the quantity of this time and uses this quantity in the analysis. This is easier to illustrate with a numerical example than to describe.

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