Finally, ABC alters the nature of several indirect costs, making costs previously considered indirect—such as depreciationutilities, or salaries—traceable to certain activities. Activity-based costing is a more accurate method, because it assigns overhead based on the activities that drive the overhead costs.
Where once managers had their own way of measuring the cost impact of management actions, they now measure those costs in a formal, uniform way. With ABC any enterprise will have a built in competitive cost advantage and can continuously add value to both its stakeholders and customers.
In a Journal of Accountancy article entitled "Yes, ABC is for Small Business, Too," Hicks presented a case study for one of his clients, a small manufacturer that builds components for the automobile industry.
Over time, this accumulation of data will eventually give the company a detailed picture of exactly where in the process they are spending most and in which areas they are most efficient. Divide the activities into cost pools, which includes all the individual costs related to an activity—such as manufacturing.
Activity-Based Cost Considerations The primary benefit of activity-based costing is that it brings a much higher level of focus and understanding to bear on fixed cost categories.
Figure Lampierre makes brass and gold frames.