Chapter 4. Using Activity-Based Costing
In This Chapter
Revealing traditional overhead allocations
Getting a handle on how ABC works
Implementing a simple ABC system
Working with ABC in QuickBooks
Turning on Class Tracking
Activity-based costing (or, ABC for short) may be the best new accounting idea in the last two decades. No, I must amend that. Activity-based costing is the best new idea in accounting in the last two decades.
ABC gives businesses a better way to estimate the profits of products and services, which is more important than you may think. The problem in many businesses is that overhead expenses or operating expenses don't cleanly tie to products or services. Without good allocation of overhead or operating expenses, businesses can't accurately determine which products make money and which don't.
ABC addresses this problem by using the power of the computer (QuickBooks in this example) to directly trace overhead costs to products and services. Surprisingly, ABC accomplishes this task in a pretty straightforward, simple fashion. In this chapter, I show you what I mean.
Revealing Traditional Overhead Allocation
To really understand the contribution that ABC makes, you need to understand how overhead allocation traditionally works. To give you an example, take a look at Table 4-1. This is the same simple income statement that I show in several chapters throughout the book.
Table 4.1. A Simple Income Statement
Less: Cost of goods sold