What Is Activity-Based Costing? (Oracle Cost Management)


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What Is Activity-Based Costing?

According to Computer Aided Manufacturing International (CAM-I): "Activity-based costing is a methodology that measures the cost and performance of activities, resources, and cost objects. Resources are assigned to activities, then activities are assigned to cost objects based on their use. Activity-based costing recognizes the causal relationships of cost drivers to activities."

Instead of measuring the cost of what goes into your items, you measure how you make and deliver items. By understanding the activities and processes, the cost drivers that influence the cost of the activity, and whether the activity is needed at all, you can analyze the cost of making items and how to eliminate unnecessary steps.

CAM-I Activity-Based Cost Terminology

The following definitions from the CAM-I glossary of Activity-Based Management are used with permission from Computer Aided Manufacturing International, Inc.

Activity Work performed within an organization. 2. The aggregations of actions performed within an organization that are useful for purposes of activity-based costing.

Activity-Based Management A discipline that focuses on the management of activities as the route to improving the value received by the customer and the profit achieved by providing this value. This discipline includes cost driver analysis, activity analysis, and performance measurement. Activity-based management draws on activity-based costing as its major source of information.

Bill of Activities A listing of the activities required (and optionally, the associated cost of the resources consumed) by a product or other cost object.

Cost Driver Any factor that causes a change in the cost of an activity. For example, the quality of parts received by an activity (e.g., the percent that are defective) is a determining factor in the work required by that activity. An activity may have multiple cost drivers associated with it.

Cost Element An amount paid for a resource consumed by an activity and included in an activity cost pool. For example, power cost, engineering cost, and depreciation may be cost elements in the activity cost pool for a machine activity. (See bill of activities, and resource.)

Cost Object Any customer, product, service, contract, project, or other work unit for which a separate cost measurement is desired.

Performance Measures Indicators of the work performed and the results achieved in an activity, process, or organizational unit. Performance measures may be financial or non-financial. An example of a performance measure of an activity is the number of defective parts per million. An example of a performance measure of an organizational unit is return on sales.

Process A series of activities that are linked to perform a specific objective. For example, the assembly of a television set or the paying of a bill or claim entails several linked activities.

Resource An economic element that is applied or used in the performance of activities. Salaries and materials, for example, are resources used in the performance of activities. (See cost element.)

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Glossary

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Activity	Work performed within an organization. 2. The aggregations of actions performed within an organization that are useful for purposes of activity-based costing.
Activity-Based Management	A discipline that focuses on the management of activities as the route to improving the value received by the customer and the profit achieved by providing this value. This discipline includes cost driver analysis, activity analysis, and performance measurement. Activity-based management draws on activity-based costing as its major source of information.
Bill of Activities	A listing of the activities required (and optionally, the associated cost of the resources consumed) by a product or other cost object.
Cost Driver	Any factor that causes a change in the cost of an activity. For example, the quality of parts received by an activity (e.g., the percent that are defective) is a determining factor in the work required by that activity. An activity may have multiple cost drivers associated with it.
Cost Element	An amount paid for a resource consumed by an activity and included in an activity cost pool. For example, power cost, engineering cost, and depreciation may be cost elements in the activity cost pool for a machine activity. (See bill of activities, and resource.)
Cost Object	Any customer, product, service, contract, project, or other work unit for which a separate cost measurement is desired.
Performance Measures	Indicators of the work performed and the results achieved in an activity, process, or organizational unit. Performance measures may be financial or non-financial. An example of a performance measure of an activity is the number of defective parts per million. An example of a performance measure of an organizational unit is return on sales.
Process	A series of activities that are linked to perform a specific objective. For example, the assembly of a television set or the paying of a bill or claim entails several linked activities.
Resource	An economic element that is applied or used in the performance of activities. Salaries and materials, for example, are resources used in the performance of activities. (See cost element.)