Quite a few years ago, when I studied cost accounting and budgeting the whole thing was pretty straightforward. You had the fixed costs which were fixed, the variable costs which were variable then you prepared a forecast and then you measured the deviation of actual figures against the forecast. Pretty straightforward.
Lately I have been reading about some cost accounting system called ABC (Activity Based Costing) but I must be missing something. Either that or the whole thing is a lot of inflated fluff with much less substance than the authors seem to imply. All I see is that it sort of distributes the fixed costs with the variable production costs.
Am I missing something huge here? Or is this a lot of fluff for a few people to sell books and this will be forgotten after a while?
I studied accounting (majored in it in fact) during the early 90s and ABC was just a part of our Managerial Accounting course, cost accounting, ABC, variance analysis . . . tools for interal measurement purposes.
Not much help, but I strongly suggest that a couple of good text books can better set forth the justification for ABC. Its not a fad, as least, it certainly was not taught as anything off the wall.
I guess my question is “what is that elussive essence of ABC that I seem to be missing?” I have read a few articles talking about it like it’s the best thing since sliced bread but they were sorely lacking in substance.
Here is a little slide show that has a brief overview of why ABC is “better” than traditional cost accounting. They even work through an example of how to use it.
It attempts to compile the “true” product cost. And it seems like it’s a good model to use when you’ve got a company with lots of overhead. In that kind of situation, just allocating overhead across various products can be kind of arbitrary, and not represent how much it really costs [from soup to nuts] to get a product to market.
Where I work, we have a pretty darn basic way of allocating our overhead to various projects. Sometimes I wonder if it’s not the best way, but it’s simple.
I graduated with my accounting degree in 1995, and I probably haven’t dealt with ABC since then, when I was studying for the CPA exam. But it was definitely part of the course of study, and was no more fluff than was anything else that was covered in Cost Accounting.
I think a lot of business consultants are selling the ABC thing right now. Probably with as much fanfare as Total Quality Management which they were selling to everyone a decade ago. I’m not surprised to hear that is’s nothing new.
The publicly owned utility which I work for is doing this at the suggestion of our very expensive consultants.
How it is supposed to help is anyone’s guess, and no one really cares. Everyone has learned to roll their eyes and nod politely when the consultants start talking.
Scout, thanks for the link which does give the basic information I was looking for.
honkytonkwillie, yes, I get the impression it is the current fad. Like everything it does have a nugget if useful stuff in it but I think they are adding a lot of fluff and marketing it like a cult.