%201.svg){kind=small}
Latest posts
Download resources
Activity-based costing: definition & important aspects for buyers
.jpeg)
Activity Based Costing in a nutshell:
Activity-based costing is a cost accounting method that allocates overhead costs to cost centers based on the actual activities performed. For purchasing, this method enables a more precise assessment of the true procurement costs and helps to identify cost drivers in procurement processes.
Example: An automotive supplier uses ABC and determines that the procurement of C-parts incurs average process costs of 105 euros per order, which are made up of 45 minutes of working time (67.50 euros), IT systems (25 euros) and quality assurance (12.50 euros).
Contents
Introduction to Activity Based Costing
What is activity-based costing?
Activity Based Costing (ABC) is a method for the precise recording and allocation of overhead costs to products, services or customers. In contrast to traditional cost accounting approaches, which allocate costs across the board, ABC analyzes the actual activities that consume resources and assigns the costs to these activities. This enables a more accurate representation of the cost structure and helps companies to identify cost drivers and manage costs more efficiently.
Core elements of activity-based costing
Importance of activity-based costing in purchasing
In purchasing, activity-based costing enables a detailed analysis of procurement costs by making the costs of individual purchasing activities visible. This transparency enables buyers to identify inefficient processes, uncover hidden costs and take targeted measures to reduce costs. ABC also supports the evaluation of suppliers by taking into account the actual process costs and thus enabling well-founded decisions for strategic partnerships.
Application of activity-based costing
Activity-based costing allocates costs directly to the activities that cause them. This enables a more precise cost calculation by allocating overhead costs to products or services based on actual resource consumption.
Calculation example
Example: A company produces two products, product X and product Y. Annual overhead costs of €50,000 are incurred for quality inspections. These costs are caused by the number of tests carried out.Activity data:
- Product X: 200 tests per year
- Product Y: 300 tests per year
- Total number of tests: 500 tests
Identify cost drivers:
- Cost per test = 50,000 € / 500 tests = 100 € per test
Cost allocation:
- Product X: 200 tests x 100 € = 20,000 €
- Product Y: 300 tests x 100 € = 30,000 €
Through this precise allocation of quality inspection costs, the company recognizes that product Y causes higher indirect costs. This enables targeted measures to reduce costs or adjust prices.
Evaluation and strategic findings
✓ Critical success factors
→ Process accuracy: detailed documentation and precise measurement of all relevant activities in the purchasing process
→ Cost driver identification: Correct determination and quantification of the relevant cost drivers for each activity
→ System support: Implementation of suitable software tools for efficient data collection and evaluation
⚠ Challenges and limitations
→ Degree of complexity: High effort for the initial introduction and ongoing maintenance of the system
→ Data quality: dependence on precise activity data and correct cost allocation
→ Acceptance: Need to convince all stakeholders of the methodology
Future trends and strategic implications:
"Activity-based costing is becoming a real-time tool for strategic purchasing decisions thanks to digitalization."
→ Integration of AI for automatic activity recognition
→ Predictive analytics for cost driver forecasts
→ Dynamic adjustment of cost allocation
→ Improved make-or-buy decisions through more precise cost analyses
Conclusion on activity-based costing
Activity-based costing is an indispensable tool for precise cost allocation and strategic decision-making in modern purchasing. Despite initial implementation challenges, the method enables significantly more accurate cost transparency than traditional methods. Increasing digitalization and AI integration make ABC even more efficient and meaningful, enabling optimized management of procurement processes and informed make-or-buy decisions. The long-term benefits of improved cost control and strategic purchasing decisions clearly outweigh the initial outlay.
