1. Cost Objects
and
2. Identifying Activities

Let's continue from Part 1:

This analysis can include the actual job description as a starting point but it goes beyond this basic listing. It involves analyzing each task including breaking tasks down to separate activities. The analysis can include tasks that may not be included in the job description.

The activities you identify should be directly traceable to the cost object. Costs from support services are not usually traceable directly and are not used in ABC to determine costs of final products. Although, you may choose a cost object that directly uses support services such as the cost object of billing customers that uses the mail services department.

As an example, some activities for installing a telephone line might be:

• gathering customer information
• driving to the installation site
• putting up the wire
• testing the telephone line

and so on.

For example, a customer call center might have the following:

• receive phone call
• call up customer on screen
• enter customer requirements.

As with the discussion of equipment, the team moves methodically through each of the activities performed by all of the functions or departments, and documents its decisions using DACUM[1].

Cost Drivers

The next step is identifying Cost Drivers. This process is similar to that of cost measurement as presented earlier. The main difference is that you focus on what causes the costs of performing an activity; whereas, in cost measurement, we traced costs directly to the cost object. We want to find out how much it costs to perform each activity. The same principles about complexity apply to ABC. You should try to narrow cost drivers to an easily usable number. The number depends on the activity, activities can usually be narrowed to one or two drivers.

Cost drivers for the activities mentioned above in installing a phone line might be:

• gathering information-time spent by the customer service operator
• driving to the site-distance to the site
• putting up wire-distance to switching box
• testing line-time spent by tester

Activity Drivers

The fourth step is to identify Activity Drivers. These drivers are what cause the cost objects to use activities. This refers to an important distinction between ABC and regular cost measurement. In ABC, cost objects use activities and activities use costs. You should identify activity drivers for each activity in order to connect the activity to cost objects. For example, if your cost object is a customer and one of the activities is making sales calls, then the activity driver could be number of sales calls.

Again referring to the example of installing a phone line, you might have an activity driver of “number of new requests for phone lines.”

Cost per driver minus cost per activity or A_d = "c/d - c/A" for the equation minded.

In this step you figure out the cost for each cost driver in the same way you figured them out when measuring costs. This should give you the cost for each activity. You then figure out how much of the activity is used in an object and multiply this by the amount per activity.

SPECIAL NOTE

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