ABC Method

ABC Method Concept

ABC method or System (Activity Based Costing) is an accountancy technique or method, developed by Robert Kaplan and Cooper at Harvard in the mid 80s being applied in analytic accounting with the aim to guarantee a correct attribution of all costs, including the indirect costs to activities that are in its origin. The use of ABC method allows the organizations to determine costs associated to each activity, segment, area or product (being, to each costs center) and, this way evaluate profitability or contribution of each costs centre for the company’s profitability as a whole.

The costs are analyzed, associating the activities to the products or services based on the search for such activities for the product or service during the production process. In fact, ABC method shows the relation between consumed Resources (what was spent; water, energy, salaries, raw materials, etc.), performed Activities (where was spent: production, computers, sales, after sales services, etc.), and Cost Objects or Outputs (for what was spent: product A, product B, Activity C, etc.).

While in the traditional methods used in analytic accountancy costs allocation is made by criteria for limited apportionment (usually produced or sold quantity), on ABC method exists a multiplicity of criteria (denominated steering costs or cost drivers) each one specific to the activity (cost) to which relates. Steering costs (cost driver) represents the volume cause of the resources consumed by the activity.

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