Activity Based Costing for Calculating Product Profitability

Posted by Gerry Poe

The best ERP software which includes Activity Based Costing (ABC) allows for the accumulation and recovery of costs associated with the purchasing, manufacturing and selling of items and thereby improved accuracy in calculating product profitability.  Overhead costs are accumulated against items by attaching elements of cost at the transition points of purchasing, manufacturing, or selling. 

ABC is not another inventory costing method (e.g. Average, Standard, FIFO, LIFO and Last) but, rather, it provides you with a different method of calculating these costs.

The traditional costing method of loading overheads against a product according to the labor content becomes increasingly inaccurate when processing a diverse range of products, particularly where disparate overhead usage is involved.

The Benefits of Activity Based Costing

  • Adopt a migration approach, recovering
    additional overheads according to an
    implementation plan
  • Attach user-defined elements of costs to transition
    points in the purchase, production and sale of
  • Appropriate pre-production costs as stock is
    received from purchasing
  • Apportion manufacturing costs as stock is received
    from Work in Progress
  • Distribute post-production costs through cost of
    sales as the final item is invoiced
  • Calculate single batch or item based activities

Because these overhead costs often comprise a significant portion of the total cost of a product, ABC allows increased accuracy in calculating the cost recovery, and thereby improved accuracy in calculating product profitability.

If you are interested in learning more about activity based costing and how an award winnning ERP software solution from SYSPRO can help you improve profitability, download: Activity Based Costing Fact Sheet.

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Tags: ERP, Factsheet, Activity Based Costing, SYSPRO

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