![]() Whenever costs are pooled and distributed to LOBs on the basis of averaged transfer or ACD rates, individual LOB costs will be distorted – a result from over- and under-costing. In addition to activity pools, other pools are created to facilitate the allocation of costs to activities such as utility and facility pools that are allocated to activities based on floor space or headcount. Since costs are pooled, aggregated, and blended by activity, individual resource cost components lose their identity. Continued reliance on cost “pools.” Although ABC was developed to overcome the disadvantages of cost pools as used in conventional cost accounting, ABC continues to use pooling at the activity level.The case study, found later in this document demonstrates the importance of “costing” activities in terms of both effort (FTEs) and monetary measures. However, measuring the activity “cost” in terms of the effort expressed in Full-Time Equivalents (FTEs) consumed in addition to dollars can uncover additional opportunities for improvement. Selection of activities requiring corrective action based solely on cost is misleading as cost is not equivalent to value. Since the data source for ABC is typically the general ledger, the only measure of resource consumption is dollars. The lack of activity dependencies significantly limits the use of ABC for effective operational and financial management. In most applications of ABC, a simple “laundry list” of activities are used which are void of their interdependent relationships. Lack of process identification and activity dependencies.Many of the advantages of ABC, over that of conventional absorption cost accounting, are offset by its disadvantages: The following represents the most significant issues related to conventional ABC. ![]() Limitations/shortcomings of conventional ABC systems. As a result, LOBs receiving the activity costs in this manner will be either over- or under-costed. The ACD rate may be comprised of a wide dispersion of costs of which the average rate often is not representative of any individual product or service. The selection of a single driver that represents the cost behavior of the activity when, in actuality, the activity may be influenced by a multitude of drivers whose costs can be defined as being fixed, variable, and semi-variable whereby ACD rates are typically treated as being 100% variable creating a linear relationship between volume and LOB activity costs.The two main issues associated with this approach are: A single principal Activity Cost Driver (ACD) is identified for each activity and an average cost per ACD is computed and used to assign activity costs to objects based on the consumption of the number of drivers by each object. The manner in which activity costs are allocated to cost objects ( e.g., LOBs, channels, customers, etc.). Since each employee represents 25% of total FTE effort, 25% of total wages ( e.g., $100,000) will be assigned to the activities performed by each employee.Īlthough total department costs can be assigned to activities, the error within each activity is quite significant and becomes more inaccurate and misleading if additional activities are performed by the department ( including shared activities among departmental employees along with cross-functional activities performed across departmental boundaries). ![]()
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