Activity Based Costing: Don’t Slow Me Down!
Activity Based Costing (ABC) is method of assigning direct and indirect costs to units of production. It involves determining the cost of each activity performed then adding direct and indirect costs related to batches, production and facilities. When production costs are accurately tracked, organizations can use this knowledge to plan better, create better price quotes and to justify billing for “cost +” contracts (i.e. cost + 25%). In the below two paragraphs I talk about collecting time, duration, costs an units produced at the unit and batch level of Activity Based Costing.
Tracking labor and production at the unit level
Whatever time collection process you choose, the process should be accurate and easy to use. The lower the level of detail that you track your time the more useful the information will be for planning and pricing. An example of this would be making the decision to track ‘testing time’ by unit and unit type rather than just as a bulk input category of ‘testing time’. Activity Based Costing can be performed by simply tracking the bulk labor category of ‘testing time’, however future costing exercises will be much more accurate if data is collected based on Unit Type, Labor Hours (cost), Duration (for production planning) and quantity produced. We make cloud based time tracking software that will track time, duration, cost and units produced if you need a system to assist with this. Our time entry screen is designed specifically to track time against repetitive tasks and will not slow down productivity or impact output. The level of detail at which you choose to track your labor should be as low as possible while still maintaining system usability and speed of input.
Tracking labor and costs at the batch level
Labor and production costs should be collected along with batch specific costs at a ‘Batch’ level. Meaning, for each ‘batch’ produced, what are the costs associated with producing it? Tracking costs at the batch level helps ensure that setup costs, breakdown costs and other variable costs associated with a batch run are properly accounted for. Tracking can be done via simple excel spreadsheets or within our expense tracking module. Within our software “General Expenses”, or project (batch) specific expenses can be planned and tracked by authorized personnel creating a system that tracks both labor costs and batch costs. Our “General Expense” category is designed specifically to collect higher level expenses such as the costs no directly associated with specific labor categories. Summarized batch data (detailed labor costs, direct and indirect costs and expenses) provides a higher level overview of true batch costs while providing batch specific cost breakouts under the appropriate expenses categories. Indirect costs such as administrative processing should also be accounted for and tracked to ensure that total batch costs are accurate when needed.
Conclusion: No matter what the system is that you use, making sure you collect accurate time, duration, cost and units produced for Activity Based Costing is extremely important. Activity Based Costing is based on data so the more accurate your data is, the more accurate your Activity Based Costing will be.
See my other post about Activity Based Costing here.
About Us - At OnTrax Timesheets, we make a cloud based time tracking software that is ideal for tracking repetitive tasks and manufacturing. The additional expense module allows for tracking costs other labor costs and makes it perfect for Activity Based Costing (ABC) and tracking both the production of units and batch related costs.
