Using Activity-Based Costing
In This Chapter
- Understanding traditional overhead allocation
- Seeing how ABC works
- Introducing a simple ABC system
- Working with ABC in QuickBooks
- Activating the Class Tracking feature
- Working with classes in ABC
Activity-based costing (ABC for short) may be the best new accounting idea in the last three decades. No, I must amend that: Activity-based costing is the best new idea in accounting in the last three 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.
Reviewing 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