Professor Elam

This morning the e mailbag contained a good question.  A cost student questions why we have  a third costing system in ABC when we studied variable and absorption in the previous chapter.  Here’s the answer.

ABC is NOT an alternative to absorption or variable.  Those two methods address whether we expense all fixed costs (variable) or carry some forward as assets to the next period (absorption).  These result in different presentations on the income statement  and balance sheet, remember the discussion between Sean and Mary?  ABC does not result in different presentations on the financial statements. 

ABC reflects the change in the American economy from manufacturing to service.  A manufacturing environment tracks costs in the traditional direct labor, direct material, mfg OH cost pools.  But for companies like UPS or Fed Ex or a real estate firm or a bank, this makes no sense as there is no direct material cost.  So a different method of looking at labor was invented where we classify costs bg activities rather than DL DM MOH.  Recall the problem about the bank tellers and the two officers. The activities were making deposits, opening accounts, etc. 

Okay think about an accounting firm or a radio station.  What is the product?  Service, and we would need to track the activities of the participants to divide up their work day.  Eliminating non value added activities, the dictum of JIT, would result in spending time on more profitable pursuits.  This is why we want to avoid multiple set ups, they don’t produce anything. 

Is anyone doing this or is this just another academic concept?  Well here is a page from the
Comptorller of the Defense Department  no less explaining how to implement an ABC system.

DLE