SAP

Moving ahead, profitability is a function of revenue and cost. The prerequisite for analyzing profitability is the understanding of revenue and cost by products, services, customers, channels etc (also called cost objects). And no methodology provides a better way to understand your costs than Activity Based costing (ABC).

ABC is a costing methodology that assumes that activities cause costs and that cost objects (products, services and customers) create the demands for activities. Costs are assigned to products based on individual cost objects’ consumption or demand for each activity. ABC systems simply recognize that businesses must understand the factors that drive each major activity, the cost of activities and how activities relate to cost objects.

Implementing a costing information system (CIS) based on ABC is a big step towards adopting profitability analysis. However it is easier said than done. It’s a major change management exercise that extends beyond the costing department to production, sales, procurement in fact to the entire organization. What are the challenges in implementing ABC and how to prepare the organization for such a change? Please look on for the next blog.