What is an Activity-based Costing (ABC)?
Activity-based costing (ABC) is an accounting technique used to allocate costs to a product, process, or service based on the activities. It can help to identify and track the costs associated with running an online business, such as website hosting, payment processing, and customer service. It highlights the true cost of running an online business and can help to make informed decisions about pricing and investments.
Significance of Activity-based Costing (ABC) in E-commerce
ABC is an important tool in e-commerce as it allows companies to track and allocate costs associated with specific activities accurately. Here are some added benefits of ABC method:
- It allows businesses to identify areas where they can reduce costs, make pricing decisions, and implement other strategies to improve efficiency and profitability.
- By tracking costs associated with specific activities, companies can better understand the cost of goods sold and make more informed decisions about pricing, product development, and marketing strategies.
Prerequisites to Calculate Activity-based Costing (ABC) and How It Works
The prerequisites to calculate activity-based costing are –
- An understanding of how activities are related to the costs associated with them.
- Familiarity with the cost components of e-commerce businesses.
- Knowledge of e-commerce business processes and operations.
- An efficient system to monitor and track e-commerce activities and their associated costs.
Activity-based costing allows businesses to better understand the costs associated with each activity and make more informed decisions on allocating resources.
Use Case With Activity-based Costing (ABC)
A company, XYZ, incurs an annual electricity bill of AUD10,000. Let us assume workers worked 1000 labour hours.
Therefore, calculating the cost driver rate,
AUD10,000 / 1000 = AUD10.
Thus, for product MNO, the company XYZ uses electricity for 5 hours. Thus overhead costs will be AUD10 times 5, or AUD50.