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A PRIMER ON ACTIVITY-BASED COSTING (ABC).

ABC is an analytical tool that has been picked up by businesses as a fundamental element of Category Management. ABC assigns costs to activities in the workplace as a way of both revealing those costs (which may have been previously hidden) and finding ways to reduce them. Ultimately, it provides a better understanding of how profits are generated.

The Food Marketing Institute's publication "Category Management: Getting Started" defines activity-based costing (ABC) as "an accounting method that enables a business to understand more precisely how and where it makes a profit. In ABC, all major activities within a cost center are identified and the costs of performing each are calculated -- including costs that cross functional boundaries. The resulting costs are then charged to the product, line, customer or supplier that caused the activity to be performed. "ABC provides a more complete picture than traditional accounting methods of the profits and the costs of doing business fine-tuned to a particular category, vendor or item. It also includes those costs that add or delete value for the customer."

Joel Wiener, industry consultant, says, "ABC is a critical tool because the retailer cannot easily implement Category Management unless it has a system that tracks and measures profitability. ABC does that."

According to Jack Haedicke, ECR Performance Measures Operating Committee, "The best thing about ABC is not what it tells you about costs, but what it tells you about profits: where they are and how you can make them even greater. With activity-based costing, you get a management tool that gives you the cost and profitability information you need to truly understand your businessand with that kind of information, you get the results you need to be competitive in today's tough global market."
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Publication:HFN The Weekly Newspaper for the Home Furnishing Network
Date:Sep 7, 1998
Words:288
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