The Business Book

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A S S I G N C O S T S

A C C O R D I N G T O

T H E R E S O U R C E S

C O N S U M E D

ACTIVITY-BASED COSTING

C

ost accounting seeks to

determine a company’s

costs of production by

measuring direct costs (such

as raw materials) and adding an

estimate of overhead or fixed costs

(such as utilities). According to

Professor David Myddelton of

Cranfield School of Management

in the UK, the inherent inaccuracy

of this method often means that

companies know far less than they

Activity-based accounting calculates the

actual overhead cost of products and services.

These are exact, so the company is able

to calculate accurate unit costs.

This accuracy allows the company to make good

decisions about how best to use resources.

IN CONTEXT

FOCUS

Costs and efficiency

KEY DATES

1911 F. W. Taylor—one of the

first management “gurus”—

writes The Principles of

Scientific Management. In

it, he suggests methods for

creating an accurate

costing model.

1971 US professor George

Staubus writes Activity

Costing and Input-Output

Accounting. His book

encourages interest

in activity-based costing

among US manufacturers.

1987 US business experts

Robert Kaplan and Robin

Cooper define activity-based

costing in their book,

Accounting and Management.

Assign costs according to

the resources consumed.