Why Do Companies and Organizations Move to ABC?
Business people are moved to adopt ABC by a desire to improve costing accuracy, mainly to get closer to the actual cost and true profitability of individual products and services. And, they also move to ABC to understand better the actual costs and return on investment from projects, programs, or other initiatives.
ABC pursues these objectives essentially by making direct costs out of many of the expenses that traditional cost accounting treats as indirect costs. Examples below show how ABC does this.
Organizations that use ABC consistently and effectively are said to practice activity-based management (ABM).Here, managers turn to ABC to support decisions about pricing, adding or deleting items from the product portfolio, choosing between outsourcing and in-house production, and evaluating process improvement initiatives. For more on ABM, see the section below "What is activity-based management?"
The percentage of organizations currently using activity-based costing varies significantly from industry to industry. Various surveys in the period 2012-2017 report the highest rate of firms using ABC in manufacturing (20%-50%), followed by financial services (15-25%), public sector (12-18%), and communications (6-12%).