Another Look at ABC


I believe the analysis in “Learning to Love ABC” ( JofA, Aug.99, page 37) is flawed.

The author shows a chart of accounts from a general ledger that summarizes various accounts, but neglects to mention most general ledger systems allow the accountant to expand the accounts to show direct costs by department, activity and other variables—not just by department. Therefore, the salary account in the general ledger could contain all the activity-based costs he shows in the chart. These direct costs are collected via timecards or computer entry.

The main reason to use activity-based costing is to allocate the estimates of overhead costs that traditionally were allotted on a plant- or company-wide basis. The activity-based costs allow the accountant to allocate the overhead costs on a basis more in line with the overhead incurred by the activity.

To arrive at a correct estimate to allocate overhead costs, the CPA must have input from the appropriate personnel. Without information from company insiders, the CPA will continue to stumble in implementing ABC.

Benjamin F. Mathews, CPA
Coral Gables, Florida

Author’s reply: It is correct that time cards and other volumetric measures are essential to trace and segment how expenditures are uniquely consumed by work activities and eventually into products, service lines and customers. But the general ledger first recognizes the expense transaction, such as payroll itself. It is from the ledger balance that those expenses are assigned, using the required standard of measurement. This task is absorption costing, of which ABC is simply an advanced form.

The first point of the article is that there is increasing acceptance that expense data should be transformed in a separate analytical tool, not in the general ledger. The second is that the accuracy of the final cost objects is much less sensitive to the timecard data and much more sensitive to the activity drivers and the entire network structure of the cost assignment system.

I agree that input from cross-functional personnel is essential to continue properly tracing and transforming expenses into calculated costs.

Gary Cokins
ABC Technologies, Inc.
Bingham Farms, Michigan

SPONSORED REPORT

Year-end tax planning and what’s new for 2016

Practitioners need to consider several tax planning opportunities to review with their clients before the end of the year. This report offers strategies for individuals and businesses, as well as recent federal tax law changes affecting this year’s tax returns.

QUIZ

News quiz: IRS warning on cyberattacks and a change in pension rules

Once again, the IRS sounds the alarm about a threat from cyberthieves. See how much you know about this and other recent news with this short quiz.

CHECKLIST

Bolster your data defenses

As you weather the dog days of summer, it’s a good time to make sure your cybersecurity structure can stand up to the heat of external and internal threats. Here are six steps to help shore up your systems.