Technology for Activity-Based Costing.

• Author: Vieceli, Jeffery

Technology is an increasingly pervasive influence on the daily work of finance officers. The diffusion of enterprise resource planning (ERP) systems has promoted information integration. Such integration in turn has led to a resurgence of interest in topics such as performance measurement, process improvement, and activity-based costing. Although ERP technology has advanced the decision making capabilities of state and local governments, it still is relatively weak in producing "out-the-box" cost accounting solutions. This article reviews stand-alone software packages that provide activity based costing functionality.

What is Activity-Based Costing?

Simply stated, activity-based costing, commonly known as ABC, focuses on tracing costs to activities. More specifically, ABC is a response to weaknesses in traditional cost accounting systems that lead to product cost distortions because of the use of allocation techniques for overhead costs. ABC techniques improve the tracing of indirect and administrative support costs by attaching them first to activities and processes and then to products, services, and customers. Finance officers interested in learning about the fundamentals of ABC should obtain a copy of Cost & Effect: Using Integrated Cost Systems to Drive Profitability and Performance by Robert Kaplan and Robin Cooper (Harvard Business School Press). ABC is more than just an accounting tool--it is also a management tool. The detailed information of the ABC system may be used in a variety of management initiatives such as: performance/productivity measurement, reengineering initiatives, and outsourcing decisions.

ABC vs. Traditional Cost Management

The detailed information about time and resources spent on individual tasks and activities is generally not available or is difficult to determine. What happens if several departments are involved in a process? How are the costs of performing that function tracked, analyzed, and later budgeted for? Traditional systems do not provide the detailed information necessary to accurately create realistic budgets nor do traditional systems provide an accurate way to distribute overhead costs.

Finance is moving from the traditional control function to a strategic management function. Citizen concerns about taxes that peaked two decades ago have led governments to focus on what tasks are being performed and the associated costs. Traditional accounting and cost management systems only provide high-level...