Voyage of Discovery: For All Its Professed Benefits, Activity-Based Costing Isn't an Easy System to Implement. Selvan Naidoo Draws on His Experiences of Establishing ABC in a Shipping Company to Describe the Key Decisions to Be Made-And the Major Pitfalls to Be Avoided. (How to Activity-Based Costing)

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Activity-based costing (ABC) is often viewed as a daunting task, perhaps quite rightly so. The processes of data accumulation and cleansing demand a lot of effort, but following a few basic principles from the start can help to sharpen your focus and improve results.

Many ABC projects set out in search of costing information, but this can be an extremely broad area and can mean different things at different levels of management. It is therefore critical that you establish at the outset exactly what you want to achieve from the exercise.

First, you need to decide whether or not the results will be used at a strategic level. This will significantly influence the extent of your activity analysis. If only a high-level review is required, then the amount of analysis could be aggregated to a much more manageable level. Conversely, if strategic cost management is the key objective, then it may be necessary to go down to the level of individual tasks. It must be noted that the law of diminishing returns is very much applicable when comparing the objectives of the project with the effort, cost and accuracy of …