The Emergency and Benefits of Activity Based Costing

The ABC method emerged as a result of setbacks of traditional methods of costing (Drucker, 1999). The approach was developed in manufacturing sector in United States of America, during the 1970s and 1980s. It was first recognized in 1987 by Robert and Bruns in their academic writings. At this period, The Consortium for Advanced Management International formalized the principle which from then is referred to Activity Based Costing. Activities were indentified and costs incurred directly assigned to those activities. These costs are then assigned into the products that use the activity in the process of production. Financial institution borrowed the method from manufacturing firms. They use the method to assign indirect costs into various products and customers.

There are various benefits of using this method. It facilitates budgeting and performance evaluation. When preparing a budget, these activities and costs are put into consideration (Drucker, 1999). The end results are compared with the budgeted costs to measure performance.

The ABC provides an accurate and objective method of assigning costs to products than in the traditional method of costing. Financial managers make decisions from accurate information. ABC helps to establish the number of people required in a process. (Drucker, 1999). Only the required and productive human capital is maintained. Better plans on retirement, capacity planning and skill development are put in place.

Employees’ support assists organization to achieve its objectives. ABC gives the employees cost consciousness. This can greatly reduce any unwanted costs in the activities they are involved in.

Despite the large list of benefits ABC have some limitation. Sometimes, it is not easy to assign indirect costs to a given activity and products. It is also an expensive method of costing, a lot of data collection, additional costing staff and costs of planning.


. New York: Harper Business.Management Challenges of the 21st CenturyDrucker, P. F (1999).