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Activity-based costing

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My boss, who is an owner of a large full-service security company, is considering investing several hundred thousand dollars in a new activity-based costing system. We work in a very competitive industry with a wide variety and levels of commercial, building, homeowner and personal protective service offerings. As the controller, they are asking for my advice on how to analyze this decision and what factors they should take into consideration. What would I say?

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Solution Summary

This discusses the concepts related to activity-based costing

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One should consider the benefits of ABC and the cases where ABC will be beneficial for the company

Wht is ABC

Activity-based costing is cost accounting methodology that assigns costs to activities-based on their use of resources, and assigns costs to cost objects (products, functions, projects) based on their use of activities. It attempts to precisely allocate overhead-based on the real factors that create costs.

Difference form traditional costing system

This system differs from traditional costing systems in that ABC recognized that resources are consumed by processes or products in different proportions for each activity.

Traditional costing systems focus primarily on direct materials and direct labor and arbitrary allocate other resources-based on direct labor hours, labor dollars or direct machine hours. In this process, sales, marketing and administrative costs are not included.
In activity-based costing, the primary goal is to make indirect costs ...

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