Activity-Based Systems: Measuring the Costs of Resource Usage

Activity-based cost (ABC) systems estimate the cost of resources employed in organizational processes to produce outputs. Managers can use the ABC resource usage cost information to monitor and predict the changes in demands for activities as a function of changes in output volume and mix, process changes and improvements, introduction of new technology, and changes in product and process design. The periodic measurement of actual expenses in the form of short-term contribution margin is measured as price less the cost of resources acquired as needed. Managers may be encouraged to modify their use of resources in the short run based on information on unused capacity. Some firms use their ABC information to reprice their products, services, or customers so that the revenues (resources) received exceed the costs of resources used to produce products for individual customers. ABC models can help managers reduce resource usage while holding revenues constant.