In the late 1980s, with the widely use of MRP, CAD, CAM, MIS, as well as the rise of FMS and CIMS, American business man recognized that the products’ cost was always inaccurate, because of higher and higher percentage of indirect cost or overhead cost. Harvard University's young scholars Robin Cooper and professor Robert S Kaplan is aware of this situation, after investigating of U.S. Companies, they put forward Activity Based Costing.
Here is a definition about Activity-based costing from Wikipedia.
Activity-based costing is a costing methodology that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each. This model assigns more indirect costs (overhead) instead of direct costs which compared to conventional costing models.
Over these years, the traditional costing models cannot get the correct answer in business because they try to allocate the indirect expenses equally to every product. So , the appearance of ABC gives companies a more accurate way to know exactly the costs through activities to the products and services.
Here are Three Stages of Activity Based Costing
1. Define business and costing object (usually products, sometimes it may be a customer, product, market, etc.). This process is very time-consuming. If two products meet the same needs of the customer, when define the business, selecting the customer is more appropriate than selecting a single product.
2. Determine the cost drivers of each business.(that is, the cost of the decided factors, such as the