Procurement Glossary
Activity-based costing: definition, methods and application in Procurement
November 19, 2025
Activity-based costing is a modern cost accounting method that allocates costs to activities and processes according to their cause. In Procurement , it enables a precise analysis of actual procurement costs and uncovers hidden cost drivers. Find out below what activity-based costing is, which methods are used and how it supports strategic purchasing decisions.
Key Facts
- Allocates overhead costs to activities and cost drivers according to their origin
- Enables transparent presentation of the true procurement costs
- Supports make-or-buy decisions through precise cost analysis
- Identifies inefficient processes and optimization potential
- Basis for strategic supplier evaluation and price negotiations
Contents
Definition: Activity-Based Costing - Explanation and Basics
Activity-based costing does not allocate costs to traditional cost centers, but to actual business processes and their cost drivers.
Basic principles of activity-based costing
The process is based on the realization that products and services consume resources through activities. First, main processes are identified and their cost drivers determined. The overheads are then allocated to the cost units via these cost drivers.
- Activity-based cost allocation
- Causation-based allocation
- Transparent cost presentation
Activity-based costing vs. traditional cost accounting
In contrast to traditional full cost accounting with flat overhead rates, activity-based costing records the actual utilization of resources. This leads to more precise calculations, particularly in the case of complex procurement processes with different processing intensities.
Importance of activity-based costing in Procurement
For Procurement , activity-based costing offers decisive advantages in the total cost of ownership analysis. It enables a differentiated evaluation of suppliers and supports procurement controlling through precise cost transparency.
Methods and procedures
Activity-based costing is implemented systematically in several phases, from process analysis to operational application.
Process identification and analysis
The first step involves the detailed recording of all procurement processes. This involves analyzing main processes such as supplier selection, order processing and goods receipt. The required resources and their cost drivers are determined for each process.
- Mapping the procurement processes
- Identification of cost drivers
- Resource consumption analysis
Cost driver determination and measurement
Cost drivers are measurable variables that determine the resource consumption of a process. In Procurement , these can be the number of orders, supplier contacts or inspection processes. The cost driver analysis forms the basis for cost allocation based on causation.
Implementation and integration
Practical implementation requires integration into existing controlling systems. Cost rates are calculated for each cost driver unit and updated regularly. The process costs are allocated transparently to cost units.
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Important KPIs for process cost accounting
Specific key figures enable the evaluation of effectiveness and the continuous improvement process of activity-based costing.
Cost accuracy and variance analysis
The accuracy of cost distribution is measured by comparing planned and actual costs. Deviations indicate the need for optimization of cost drivers or process definitions. A target/actual comparison should be carried out regularly.
- Cost variance in percent
- Accuracy of cost driver allocation
- Planning quality of the process cost rates
Process efficiency key figures
Cost rates per cost driver unit show the efficiency of individual procurement processes. Benchmarking between different areas or time periods identifies potential for improvement. The development of order costs per transaction is an important indicator.
ROI of activity-based costing
The return on investment measures the benefit of activity-based costing in relation to the implementation costs. Savings from better decisions and process optimization are compared with the system costs. Typical amortization periods are between 12 and 24 months.
Risks, dependencies and countermeasures
The introduction of activity-based costing poses specific challenges that can be minimized by taking appropriate measures.
Complexity and implementation effort
The detailed process analysis and determination of cost drivers requires considerable resources. Companies often underestimate the effort required for data collection and system adjustments. A step-by-step introduction, starting with critical processes, reduces the risk of excessive demands.
Data quality and availability
Inaccurate or incomplete data leads to incorrect cost allocations. Incorrect bases can lead to wrong decisions, especially in the cost-benefit analysis. Regular data validation and clear data collection guidelines are essential.
- Continuous data check
- Standardized recording processes
- Employee training
Acceptance and change management
Resistance to new cost accounting methods can jeopardize their introduction. Transparent communication of the benefits and intensive training promote acceptance. Integration into existing budgeting processes should be carried out carefully.
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Practical example
A mechanical engineering company implemented activity-based costing to evaluate two suppliers of standard parts. Supplier A offered lower cost prices, but caused higher inspection and rework costs due to frequent quality problems. The process cost calculation showed that the true procurement costs for supplier A were 15% higher than for supplier B. The transparent presentation of costs enabled a well-founded supplier decision to be made.
- Complete recording of all process costs
- Comparable cost basis for supplier evaluation
- Strategic decision based on total costs
Current developments and effects
Digitalization and the use of AI technologies are revolutionizing the application of activity-based costing in modern Procurement.
Digital transformation of cost recording
Modern ERP systems and business intelligence tools enable the automated recording of cost drivers in real time. This significantly reduces manual effort and increases the accuracy of cost allocation. Integrated dashboards provide continuous transparency about process cost developments.
AI-supported cost analysis
Artificial intelligence supports the identification of hidden cost drivers and the prediction of cost trends. Machine learning algorithms analyze large amounts of data and identify patterns that are valuable for purchasing controlling. Predictive analytics enables proactive cost control.
Integration in strategic procurement
Activity-based costing is increasingly being integrated into strategic decision-making processes. It supports should-costing approaches and enables data-based negotiation strategies. The link with savings programs creates measurable added value.
Conclusion
Activity-based costing is an indispensable tool for modern purchasing organizations that strive for cost transparency and well-founded decisions. It uncovers hidden cost drivers and allows costs to be allocated in line with their origin. Despite the initial implementation effort, the long-term benefits of more precise calculations and strategic decision support outweigh the costs. The integration of digital technologies will further simplify the application and maximize the benefits.
FAQ
What is the difference between activity-based costing and traditional cost accounting?
Activity-based costing allocates overheads to activities and cost drivers according to their origin, whereas traditional methods use flat overhead rates. This leads to more accurate calculations, especially in the case of complex procurement processes or those with varying degrees of complexity.
Which cost drivers are relevant in Procurement ?
Typical cost drivers are the number of orders, supplier contacts, inspection processes, complaint processing or contract negotiations. The selection depends on the specific procurement processes and their resource consumption. A detailed process analysis identifies the relevant drivers.
How high is the implementation effort?
The effort required varies depending on the size of the company and the complexity of the procurement processes. Typically, 6-12 months should be planned for the complete introduction. A step-by-step implementation starting with critical processes reduces risks and enables early success.
What advantages does activity-based costing offer for purchasing decisions?
It enables precise total cost of ownership analyses, well-founded make-or-buy decisions and transparent supplier evaluations. Hidden cost drivers become visible, leading to better negotiating positions and strategic procurement decisions.
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