A Procedure for Smooth Implementation of Activity-Based Costing in Small Companies

Abstract

:This article describes a procedure that allows companies to easily switch from a traditional costing system to an activity-based costing (ABC) system. The procedure is particularly useful to small companies (less than 100 employees) for which the standard implementation of ABC is too expensive and complex. The method, which consists of eight easy-to-follow steps, leads a company through the Cooper's two-stage activity-based costing model. At first, decision makers determine cost information, which can be obtained via an educated guess, a systematic appraisal, or actual data collection. The method used to collect the data would depend on the level of accuracy desired and the amount of money assigned to this endeavor. Next, the overhead expenses such as administration, rent, utilities, and transportation are compiled into product cost information using newly developed matrices. Using these matrices, cost-related calculations become easy and overhead costs are traced without difficulty to the cost objects in the final step. The ease of use of the proposed procedure is illustrated using actual data from a small manufacturing company located in western Pennsylvania.