Activity-based costing is useful in many industries, but it is most common in manufacturing, construction, and healthcare. Activity-based costing, or ABC, works well for businesses that have a variety of customers and sources of overhead costs.
If a company makes products that are almost exactly the same and need the same amount of care, ABC is probably not needed. ABC works well when customer needs mean that some products have to have higher administrative costs and selling costs to meet customer needs. When overhead costs make up most of a company’s costs, manufacturers use ABC.
ABC came from the manufacturing industry, where it was used when assembly lines became less labor-intensive and more automated. In the old, labor-intensive system, it was easy to figure out how much the overhead costs were in terms of man-hours. With the introduction of automation and robotics, companies had to put more money into their facilities and find a more accurate way to measure costs.
Healthcare companies used to be able to raise prices to make up for rising costs. Since 2015, however, Medicare, HMOs, and other managed care organisations have put a cap on how much they will pay providers. This makes it even more important to do an accurate cost analysis. ABC gives health care providers a smart way to allocate resources to more expensive services, like surgery and emergency care. The cost of putting ABC into place could make it less useful for smaller businesses.