Costs are caused by products in traditional accounting while activities cause costs in activity based accounting (Rumble, 1997). Since the focus is on activity, the relative value of those activities in relation to the value they provide to customers can be identified (Rumble, 1997). Overheads are also brought under more scrutiny (Rumble, 1997).
Activity Based Costing (ABC) exposes the relationships between activities and resource consumption and profits (Cooper & Kaplan, 1991). The how and why of improvements are explained by ABC (Cooper & Kaplan, 1991). Profit analysis based on customer, product line, brands or regions are revealed though ABC (Cooper & Kaplan, 1991). The data that ABC can provide to organizational leaders should be used “as a guide to reprice products or customer transactions, to alter product and customer mix, or to perform activities more efficiently” (Cooper & Kaplan, 1991, p. 135).
Activity based costing was established in the late 20th century (Wikipedia, 2015) and is the new kid on the block in contrast to traditional cost based accounting. It will take time for protocols and procedure to build up around Activity based costing as well as for it to earn its own place in the field of accountancy.
Cooper, R., & Kaplan, R. S. (1991). Profit priorities from activity-based costing. Harvard Business Review, 69(3), 130-135. Retrieved from https://hbr.org/magazine
Rumble, G. (1997). The costs and economics of open and distance learning [Adobe Digital Editions Version]. Retrieved from Amazon.com
Wikipedia. (2015, February 26). Activity-based costing [Web Page]. Retrieved from http://en.wikipedia.org/wiki/Activity-based_costing