[3] With ABC, a company can soundly estimate the cost elements of entire products, activities and services, that may help inform a company's decision to either: In a business organization, the ABC methodology assigns an organization's resource costs through activities to the products and services provided to its customers.
As such, ABC has predominantly been used to support strategic decisions such as pricing, outsourcing, identification and measurement of process improvement initiatives.
Following strong initial uptake, ABC lost ground in the 1990s compared to alternative metrics, such as Kaplan's balanced scorecard and economic value added.
An independent 2008 report concluded that manually driven ABC was an inefficient use of resources: it was expensive and difficult to implement for small gains, and a poor value, and that alternative methods should be used.
[7] Robin Cooper and Robert S. Kaplan, proponents of the Balanced Scorecard, brought notice to these concepts in a number of articles published in Harvard Business Review beginning in 1988. Cooper and Kaplan described ABC as an approach to solve the problems of traditional cost management systems.
Activity-based costing was first clearly defined in 1987 by Robert S. Kaplan and W. Bruns as a chapter in their book Accounting and Management: A Field Study Perspective.
Like manufacturing industries, financial institutions have diverse products and customers, which can cause cross-product, cross-customer subsidies.
From a historical perspective the practices systematized by ABC were first demonstrated by Frederick W. Taylor in Principles of Scientific Management in 1911 (1911.
Where products use common resources differently, some sort of weighting is needed in the cost allocation process.
A report summarizes reasons for implementing ABC as mere unspecific and mainly for case study purposes[13] (in alphabetical order): Beyond such selective application of the concept, ABC may be extended to accounting, hence proliferating a full scope of cost generation in departments or along product manufacturing.
According to Manivannan Senthil Velmurugan, Activity-based costing must be implemented in the following ways:[14] When ABC is reportedly used in the public administration sector, the reported studies do not provide evidence about the success of methodology beyond justification of budgeting practise and existing service management and strategies.
Authors note that activity-based costing system is introspective and focuses on a level of analysis which is too low.
[citation needed] On the other hand, they underscore the importance to consider the cost of capital in order to bring strategy back into performance measures.
[1] That drives the prevalence to slow processes in services and administrations, where staff time consumed per task defines a dominant portion of cost.
Even in ABC, some overhead costs are difficult to assign to products and customers, such as the chief executive's salary.
Although some may argue that costs untraceable to activities should be "arbitrarily allocated" to products, it is important to realize that the only purpose of ABC is to provide information to management.
The state of the art approach with authentication and authorization in IETF standard RADIUS gives an easy solution for accounting all workposition based activities.