Consulting Firm Says Service Businesses Can Benefit from Activity Based Costing

There is a mistaken assumption that activity-based costing is only beneficial to manufacturing businesses, but service businesses can also achieve the same benefits by using it.

Dallas, TX (PRWEB) June 6, 2004 -- Many businesses have adopted activity-based costing (or ABC) during the last decade. Robert W. Scroggins, a principal in the Dallas consulting firm RWSMC, says, In the past, most of the companies implementing ABC were manufacturing-related, so there seems to be an idea that ABC is only useful to manufacturing businesses. Its clear to us that service businesses can realize the same benefits from it as manufacturers. All businesses need to understand their true costs, which include the support required to sell and deliver goods and services. Support costs are a large part of the cost of some manufactured items. Support costs can vary for many reasons, and ABC is very useful in making sure that costs are adequately considered in the pricing decision."

ABC is a costing method developed in the 1980s to help large industrial firms improve their product costing and business processes, enabling them to compete against lower-priced competition. ABC involves analyzing the activities and processes that are required in order to accomplish the objectives of a firm and assigning overhead and other support costs to those objectives in a rational manner, which allows you to compute the real cost of producing, selling, and delivering products and services.

Says Scroggins, In an ABC study, we identify the major activities a business conducts and determine the level of service and support required. We categorize support costs according to the appropriate activities benefited, and then assign costs to activities & among activities. Finally, we assign the accumulated activity costs to cost objectives.

There are numerous benefits derived from using ABC. During their ABC studies, Scroggins says his firm finds that ABC helps you to better understand the business cost structure, which leads to better bidding, budgeting, and estimating. ABC also allows you to compute product line profitability and customer profitability, which permits you to make better decisions about your sales ‘mix and marketing efforts. ABC helps you set up a price structure that charges customers and clients according to the support required for their particular situation. We call it ‘just in time pricing. Finally, when a business fully adopts ABC, it serves as a vehicle for cost reduction, business improvement, reengineering, and change management."

When identifying businesses that can benefit from ABC, Scroggins looks for organizations undergoing changes that havent yet been incorporated in their cost structure. Adoption of new technology, changes in contracts, new products or services, new or tougher competition, you name it—anything that has changed about the business that hasnt been reflected in its cost structure makes it a good candidate for activity-based costing."

Scroggins concludes by saying, About 10 years ago, we heard predictions that only a couple of companies that were the lowest cost providers would survive in most lines of business. It appears that we are now at that point—and this includes service businesses as well. No one who is serious about their business now can afford to ignore the benefits to be derived from activity-based costing."

RWSMC is a management consulting firm based in Dallas, TX
For further information, contact Robert W. Scroggins, CPA.
E-mail: rwsmanagement@aol.com
Web site: members.aol.com/rscrogg562/
Voice / Fax: 214.941.7021 / 360.838.0943
(This firm is not a CPA firm)
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