The new courses are starting
We're looking for talented people with a great personality who are constantly pursuing the next big thing.
Activity Based Costing (ABC)
It is an advanced cost accounting method that allocates direct and indirect costs to products/services based on the activities actually performed to produce them. Unlike traditional methods, ABC identifies resource-consuming activities, allowing for a more precise calculation of a product's "true" full cost and supporting a more accurate pricing strategy.
1. Calculating the Actual Cost Impact (ABC Phases)
ABC overcomes the arbitrariness of traditional cost centers by allocating overhead costs across specific drivers.
Identification of Activities and Resources: Define operational activities (e.g., machine setup, quality inspections, purchase orders, shipments).
Resource Cost Driver: Assign costs to activities based on actual resource consumption (e.g., man hours, machine usage).
Identifying Activity Cost Drivers: Determine the cost driver for each activity (e.g., number of batches for setup, number of orders for administration).
Activity Costing Rate (ACR) Calculation: Calculate the unit cost for each driver (Total Activity Cost / Total Driver Units).
Allocation to Products (Cost Objects): Calculate the full cost of the product/service by multiplying the consumption of the activities by their respective rate.
2. ABC-based Pricing Strategy
Knowing the true impact of costs allows us to abandon pricing based solely on arbitrary percentage margins and move towards a more informed strategy.
Pricing Based on "True" Cost: Pricing is defined by adding the direct cost and the full cost of operations (ABC), adding the desired profit margin.
Eliminate “Cross-Subsidization”: Prevents high-volume products from “paying” for low-volume complex products, ensuring every product is profitable.
Profitability Analysis (Customer/Product): Allows you to identify which products or customers are truly profitable and which, despite appearing so, consume too many resources (e.g. too many orders or production changes).
Target Costing and Value Engineering: If the ABC shows that the cost of an activity (e.g. packaging) is too high for the market price, you can act by redesigning the process to reduce its impact.
Advantages of ABC for Pricing
Greater Cost Transparency: Understand exactly what generates indirect costs (overhead).
Better Strategic Decisions: Helps decide whether to discontinue a product, change price, or improve internal efficiency.
Better Competitive Positioning: Allows you to offer lower prices on simple products (not burdened by high structural costs) and fair prices on complex products.
In summary, ABC transforms accounting from a simple historical report to a competitive strategy tool, ensuring that the Pricing Strategy reflects the actual consumption of resources, maximizing profitability.