Activity-Based Costing Model

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What Is An Activity-Based Costing Model?

Activity-based costing (ABC) model assigns costs to activities based on their usage of resources. It accurately calculates product costs, improves budgeting and forecasting accuracy, and identifies cost drivers. ABC system is a more accurate way of determining the cost of products than traditional costing systems, as it considers the actual activities required for production.

Significance of Activity-Based Costing Model in Logistics and E-commerce

ABC is an alternative to long-established cost accounting that assigns costs based on direct labor, machine hours, or other output measures. It is beneficial to any logistics and e-commerce business. In following ways: 

1. Activity-based costing model allows for accurate cost assignment for each activity associated with logistics and e-commerce operations. 

2. It enables companies to measure each activity’s cost and understand their business’s cost structure. 

3. It helps to identify non-value-added activities and cost-saving opportunities. 

5. ABC model provides essential information for pricing decisions, customer profitability analysis, and other strategic decisions. 

6. It helps companies to track and monitor costs associated with activities such as storage, packing, and transportation. 

7. It helps identify areas of potential growth and areas for cost reductions. 

8. The ABC system helps to improve customer service and enhance customer satisfaction by providing accurate and timely cost information.

How Activity-Based Costing Model Facilitates Business

Let’s have a look at how an activity-based costing system works.

  • With ABC, businesses can identify and isolate the costs of specific activities, such as order fulfillment, packaging, shipping, and returns. 
  • ABC also provides insight into how changes in operations can affect costs, allowing businesses to identify areas for improvement and cost savings.
  • Using the ABC model, one can identify and measure the costs associated with individual products and services, allowing organizations to accurately determine the actual price of their operations. 

Use Case  of Activity-Based Costing Model

In this system, the company assigns different costs to each activity associated with the delivery of a parcel. For example, suppose your company sets a charge for picking, sorting, and delivering the box. Your company then uses the costs associated with each activity to determine the total cost of providing the package. In this way, the company manages the costs associated with its operations.

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