Activity Based Costing
Costing is one of the most familiar terms in Accounting and Activity Based Costing is an extended version of the same. It is quite evident that revenue and costing are equally important for any business solution as it reflects the current status of a business and predicts what comes in future. Here you can say that Activity-Based Costing revolves a deeper understanding and goes inside with general costing, helping you to identify all your costing which are being spent on the different activity of your business. That costing can be related to both time and money.
This concept was discovered within the pursuit of manufacturing during mid-80. Later it got incorporated into all service sector getting the task done easier. Initially, ABC was not widely advocated on account of its complexity but later it was simplified and started gathering the popularity. The company slowly realized the potentialities and slowly started adapting.
Here we go with the vital aspects.
It helps you to identify your costly activities
Especially in the manufacturing industry, ABC is a blessing. During production, manufacturing unit goes through several processes until it reaches the end product. For example: In a company, it has to go through many quality control tests, before approving the final product. Let’s take Product A, this may require only one check meanwhile, while in product B, they may demand 3 tier checking. So to conclude, the actual cost of product B should be higher than product A, but in conventional costing, it’s being divided equally to both, and in the end, a company cannot have right data that which is more beneficial for them, as they will not have right margin data for those.
Cost Pooling in ABC
Like we discuss different costing activities, there are few which cannot relate directly to manufacturing like administrative expenses, a salary of employee etc. Therefore in such cases, it is advisable to bifurcate those costs into different “pools”. Those activities directly attached to manufacturing should be put under the first pool, while others within second cost pool. Such pools can also have to cost like on-site customer services, after sales services, and by after making analysis those data, one can identify the most costly order.
With getting details from ABC, one can easily identify those products, which in certain circumstances, costs more, and some of those costs less. With the help of those data, management can take a premeditated decision which can be more beneficial for the company.
Things to watch out for
ABC is indeed a very nice tool, but also it has few things which can make this tough to implement into your existing system. There can be a situation that it can be hard to define exact time of the particular machine, worked how much for one particular product, as it’s doing multi-tasking for more than one product at the same time! And that effect into end report as well, where we may not have accurate details for those.
ABC in Odoo
Like another well-known ERP system, Odoo also provides a basic concept of ABC. In Odoo, one can get those details via Analytic Accounting. However, ABC touches many such activities, which currently cannot be managed automatically, even in Odoo. Yes, if those being entered manually into the system, with quite a good care, then we can have those details. But to make a system to get those things done automatically, high level of customization is required. So that can save time and cost of the company, and can have required details on their dashboard!