Activity Based Costing for large scale industries

ABC has helped many companies identify important cost and profit enhancement opportunities through reprising of unprofitable customer relationships, process improvements on the shop floor, lower-cost product designs, and rationalized product variety. It is difficult to imply activity based costing on large-scale industries. However, its potential on a larger scale represents a huge opportunity for companies. Fortunately, simplification is now possible through an approach that we call time-driven ABC

In the revised approach, managers directly estimate the resource demands imposed by each transaction, product, or customer rather than assign resource costs first to activities and then to products or customers. For each group of resources, estimates of only two parameters are required: the cost per time unit of supplying resource capacity and the unit times of consumption of resource capacity by products, services, and customers. At the same time, the new approach provides more accurate cost-driver rates by allowing unit times to be estimated even for complex, specialized transactions.

Source: Harvard Business School

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