Using Accounting Component › Budgets and Plans › Activity Based Costing

Activity Based Costing

Activity Based Costing (ABC) is a process of assigning costs to services and is typically used as a tool for planning. The method aims initially to identify and categorize the main operating activities within an organization. Once defined, the costs attributable to these activities are assigned to cost pools, which are then allocated back to services based upon how much the activity is consumed by the service. The steps that follow outline the ABC process:

• Typically, an organization can be broken down into a set of succinct activities that accomplish business processes. Cost pools are created to assemble all cost elements related to each of these activities. Refer to Cost Pool section on how to create a cost pool.
• Once activities have been identified, the principle causes of the costs for each activity needs to be identified. These expenses are categorized by establishing cost elements.
• After adding the cost elements, they must be related to their corresponding cost pools through cost pool assignment.
• The Pool Worksheet is used to apply values to the cost pools based on the expense attributed to each associated cost element. Go to Accounting, Budget and Planning, Worksheets and use the Pool Worksheet option to apply these values.
• The Service Worksheet is used as activities are traced to services. The associated pooled costs are allocated to services based on their level of consumption of activities. The Service Worksheet is used to capture these amounts, which can be fixed or a percentage of the pool total.
• Only services that contain chargeable service option group elements are eligible to appear on the Service Worksheet. This is accomplished by checking the Budget properly in the service option group element definition dialog when defining a service. In addition, to having the worksheet values applied in invoicing calculations, a cost type of Allocate Cost or Standard Cost must be selected for the service element.
• Invoices generated for accounts subscribed to these services show an expandable breakdown of services by cost pools and cost elements.

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