ABC Cost Accounting

ABC cost accounting or activity based costing should be the most accurate cost accounting method if the cost system is set up and maintained properly. This cost method attempts to drive costs as accurately as possible to individual parts or services. It does this through actual cost accumulation, and costs derived from cost activity drivers.

Most companies use the standard cost accounting system which is easier and less costly to setup and maintain. ABC can be used by companies that desire to know the true costs of production. It is best suited for the manufacture of large parts that require costly set up and maintenance.

The very best ABC cost accounting system will require that the direct labor employees record their time spent on each job. A job is an operation in the manufacture of a part. For example: if an employee machines a part, he would record his time worked on that job. Then, if he works on the assembling of a part, he would record his time worked on that job. The direct employees should also record their downtime. Downtime should be recorded with a code for the reason of the downtime. This information then is entered into the MRP system.

With all this detail for direct labor, it is possible to create very useful reporting. The reports will show actual time worked, along with parts produced and how efficient the jobs ran. The downtime reports will show the amount of downtime by reason codes. This is useful for cost improvement activities.

Indirect labor will record their time much like the direct labor. If a machine repair person works on a particular machine, he will record his time worked on that machine, and the job associated with it. If a tool & die person works on a die for a particular part, he will record the time worked, reason code and what part the die was for. This detail allows for the true costs of maintenance activities at the part number and machine level. This is extremely valuable information if some of the parts manufactured require significantly more indirect labor than others.

Any repair parts or outside services are charged to the part. This information will help when determining what costs to quote on new work.

Some costs are charged to parts based on activities. For example: fork truck drivers will move stock for many production jobs, receive in parts and ship parts. A study is done by part to determine the time that is required by the driver to do all these things. A cost is then assigned to this time. The ABC cost accounting system is set up so that when production is entered into the MRP system, these costs will then be charged on a per part basis. Activity costing is done for as many plant personnel as makes sense. Quality personnel, supervision, etc., all can be costed this way.

Other costs such as administration, sales, etc will be driven to the part based on a fair method. Human resource costs should be driven to a part based on the number of employees it takes to manufacture the part. Engineering staff costs may be charged to parts based on the complexity of parts, etc. Some costs may be driven to the part based on a percent of sales, etc.

ABC cost accounting production reports will generally show the costs for a part in time periods that can be compared. If the costs are large to set up a job, then the reports should show the time period from the beginning of the setup to the end of the run. In this way, it is easy to see if costs are improving or getting worse.