The principles of activity based costing
March 23, 2016
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Activity Based Costing, also known as ‘ABC’, is a strategic exercise which involves looking at your current costs in order to understand your business.

There are five principles that underpin any ABC exercise:

  1. The model should be linked to strategic business planning. Activity based costing is not a bean counting exercise; it’s not something you do for the sake of it. Strategic decisions should be informed by the information produced by your model.
  1. The exercise should include the whole organisation and should result in a model that can fulfill multiple demands for costing information. It should also be flexible in recognition that the demands for costing information can change over time, especially in Government policy. It is also important to involve operational areas of the organisation to get ‘buy-in’ to the exercise. A complete model then becomes the ‘foundation stone’ for improving financial performance.
  1. ‘Crawl before you walk’ is the idea that you pilot something; you test it before you implement it. This helps you to design your model in a way that answers the strategic business questions and other costing requirements that you have prior to investing in a cost model.
  1. Over time, a model should be institutionalised and become a key part of the business. It should be integrated into day-to-day operations. This is successful when the model receives official endorsement and there is organisation wide involvement and costing becomes a routine task for cost managers.
  1. ‘Do it once and do it right’ – a model should be simple, it should be comprehensive, and it should be useful.

These principles result in a visible, accepted and shared view of costs that has the buy-in of the whole business. They ensure that an Agency will realise the maximum benefits possible from the activity.

They also establish a common framework and language so all stakeholders of the model, both internal and external, are able to understand the output.

As a result, you get greater sustainability and credibility of the output, and you also achieve savings in the ongoing maintenance of the costing systems.