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Indicators for Activity Based costing (ABC)

When should management consider incurring the considerable cost of designing and implementing an activity-based costing system. Some indicators can signal the need for new costing system:

  • Line managers do not believe the product costs reported by accounting department.
  • Marketing personnel are unwilling to use product costs in making pricing decisions.
  • Complex products that are difficult to manufacture are reported to be very profitable, although they are not priced at a premium.
  • Product line profit margins are difficult to explain.
  • Sales are increasing but profits are decreasing.
  • Line managers suggest that apparently profitable products be dropped.
  • Marketing or production managers are using bootleg costing system which are informal systems they designed, often on a personal computer.
  • Some products that have reported high profit margins are not sold by competitors.
  • The firm seems to have captured a highly profitable product niche all for itself without any significant expense on research and development.
  • Overhead rates are very high, and increasing over time.
  • Product lines are diverse.
  • Direct labor is a small percentage of overall cost.
  • The results of bids are difficult to explain.
  • Competitor’s high-volume products seem to be priced unrealistically low.
  • The accounting department spends significant amounts of time on special costing projects to support bids or pricing decisions.

 

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