Overview
Activity-Based Costing (ABC) uses time tracking data to accurately allocate overhead and indirect costs to specific activities, projects, and clients, providing more precise profitability analysis than traditional methods.
How It Works
Traditional Costing
- Allocates overhead as percentage of direct labor
- All projects get same overhead rate
- Can distort true project costs
- Hides which activities are profitable
Activity-Based Costing
- Tracks time by specific activities
- Allocates costs based on actual resource consumption
- More accurate project profitability
- Identifies high-cost activities
Implementation Steps
1. Identify Activities
- Client consultation
- Design work
- Development
- Testing
- Project management
- Administration
- Sales and marketing
2. Assign Costs to Activities
- Direct labor costs (salaries)
- Indirect costs (software, office space)
- Overhead allocation
- Support costs
3. Track Time by Activity
- Employees log time to specific activities
- Capture both billable and non-billable
- Detail level enables cost allocation
4. Calculate Activity Costs
- Total cost per activity
- Cost per hour for each activity type
- Full loaded costs including overhead
5. Allocate to Projects
- Apply activity costs to projects based on time tracked
- More accurate than flat overhead rate
- True project profitability revealed
Benefits
More Accurate Pricing
- Understand true cost of services
- Price based on actual resource consumption
- Identify which projects/clients are profitable
- Justify pricing to clients
Better Decision Making
- Which services to emphasize
- Which clients to target
- Where to invest resources
- What activities to outsource or automate
Process Improvement
- Identify expensive activities
- Streamline high-cost processes
- Focus improvement efforts
- Measure impact of changes
Examples
