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How can activity-based costing help you make better strategic decisions in Corporate Finance?

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If you want to make better strategic decisions in corporate finance, you need to understand how your activities affect your costs and profits. Activity-based costing (ABC) is a method that can help you do that. ABC assigns costs to activities, such as production, marketing, or customer service, based on how much resources they consume. Then, it allocates those costs to products, services, or customers, based on how much they use those activities. By using ABC, you can get more accurate and relevant information about your cost drivers, profitability, and performance. In this article, we will explain how ABC can help you make better strategic decisions in corporate finance.

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Hanan Hasbullah

Senior Accountant @ Coreo Real Estate | Head of Finance

1 Benefits of ABC

ABC can help you make better strategic decisions in corporate finance in several ways. First, it can help you identify and eliminate waste, inefficiencies, and non-value-added activities that increase your costs without adding value to your customers. Second, it can help you optimize your pricing, product mix, and customer segmentation, by showing you which products, services, or customers are more or less profitable. Third, it can help you improve your budgeting, forecasting, and planning, by providing you with more realistic and reliable cost estimates and projections. Fourth, it can help you evaluate and compare different investment alternatives, by showing you the impact of each option on your costs and profits.

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Hanan Hasbullah

Senior Accountant @ Coreo Real Estate | Head of Finance
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ABC ensures precise cost allocation. In a manufacturing scenario, it unveiled that while traditional methods made Product B seem costly, considering all activities, it's more profitable. This clarity guides strategic resource allocation and pricing decisions.

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2 Challenges of ABC

ABC is not without its challenges, however. Implementing ABC requires a lot of time, data, and expertise. You need to identify and measure all the activities and resources involved in your business processes, and assign them to cost pools and cost drivers. You also need to collect and analyze data on how your products, services, or customers use those activities and resources. Moreover, you need to update and monitor your ABC system regularly, as your activities, costs, and demand may change over time. Additionally, you need to be careful not to overcomplicate or oversimplify your ABC system, as both can lead to inaccurate or misleading results.

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Hanan Hasbullah

Senior Accountant @ Coreo Real Estate | Head of Finance
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Implementing ABC poses hurdles like complexity, data accuracy demands, subjective activity identification, and resource-intensive processes. Overcoming these challenges is key to unlocking its strategic benefits.

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Michael Klosevych, BSS(Econ), BCom, CMA, CPA

Treasurer & Board Member, United Nations Associations of Canada Financial & Business Analyst who deploys advanced data analytics & management accounting for supporting strategic business decisions and Armchair Economist
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Consider implementing Time Driven Activity Based Costing (TDABC; look up Robert S Kaplan) to simplify a cost model and to reduce its development time.

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3 Best practices for ABC

To make the most of ABC, you need to follow some best practices. Here are some tips to help you use ABC effectively in your corporate finance decisions. First, align your ABC system with your strategic goals and objectives. Define the purpose and scope of your ABC system, and choose the level of detail and granularity that suits your needs. Second, involve and communicate with your stakeholders. Get the support and input of your managers, employees, customers, and suppliers, and explain how ABC can benefit them. Third, integrate your ABC system with your other information systems. Use software tools and platforms that can automate and streamline your data collection, analysis, and reporting. Fourth, review and revise your ABC system periodically. Check the validity and reliability of your data, assumptions, and calculations, and make adjustments as needed.

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Hanan Hasbullah

Senior Accountant @ Coreo Real Estate | Head of Finance
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Clear activity definition, accurate data, regular updates, and cross-functional collaboration are crucial. These practices enhance precision in cost allocation and streamline ABC implementation.

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4 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How can activity-based costing help you make better strategic decisions in Corporate Finance?

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1 Benefits of ABC

2 Challenges of ABC

3 Best practices for ABC

4 Here’s what else to consider

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