The world industries are unmistakably heading towards if not already immersed in, the digital and technological aspects of running a business. And understanding the way things work, and how operations are successful, is a critical element in taking your innovative entrepreneurial skills to the next level.
Financial corporations are continuously revolutionizing operations for increased efficiency and certainly improved efficacy by employees, both morale and work production. And when you have an arsenal of knowledge behind you and an internationally recognized degree to back it up, there can be no stopping you. But first, let’s delve deeper into the world of costing, finance, and the ABCs of its functioning.
What is ABC costing in finance?
Otherwise known as Activity-Based Costing is the method of costing that assigns not only indirect costs but overhead costs related to services and products. In a nutshell and to simplify jargon that can quickly become overwhelming, it means the ABC technique of cost accounting lends itself to activities considered either a unit of work, perhaps an event, or any task assigned with an end goal in sight.
· Goal tasks include setting up operating machines for production lines, creating and manufacturing products, labor for machine operating, or distributing products that are complete or in final production stages.
· These activities are considered integral and therefore consume overhead resources, these are then documented as cost objects.
The two main activity measures are:
Transaction drivers – This tells us how many times in a given period an activity takes place
Duration drivers – The time taken to complete an activity
Companies and large businesses use this method of calculating costs to keep control and more importantly an eye on current costs, therefore allowing firms to form and implement more appropriate pricing strategies.
There are natural, tried-and-tested formulas to calculate these costs in a more precise and accurate way, and with a few examples, it will be more comprehensible. Ideally, this article will be the stepping stone to motivate you to better your business practices and potential successes in the business and financial districts.
The ABC calculation method
Instructions
· Identify the activities needed to design the product and divide them into the cost pools which relate to the individual costs of an activity like manufacturing. Then calculate the total overhead cost of each of these individual pools.
· Each pool is then assigned a cost driver which will be your units and hours.
(Here’s where it can get a little tricky, but hang in there)
· Calculate the rate of the cost driver. You want to divide the total overhead cost in the pool by the total number of cost drivers = cost driver rate.
· Lastly, you will multiply the number of cost drivers by the cost driver rate.
Example
BigBoxBrands is a company that has an average annual electricity bill of $50,000. An activity directly impacting this number is the annual labor hours by employees. The cost driver in this example is therefore the labor hours worked which we will put down to 2500.
You want to calculate the cost driver rate as follows; $50,000 annual electric bill divided by the 2500 labor hours, which results in $20 for the cost driver rate.
Now, BigBoxBrand’s best-selling product the BB2 needs 10 hours of electricity for production, totaling ($20 x 10 hours) $200 total overhead cost.
When you have all the information to hand, including the costs involved in running operations, you can quickly see which areas are cost-effective, and those that cause the business financial strain. Nobody said owning or managing a successful company is easy, but with the right tools and knowledge, it will always be possible.
Make it happen
You may have the business savvy swag and know just what to say and to whom, but more often than likely those successful businessmen and women learned all they could about their industry so they are never caught on the back foot, and you would do well to do the same. Obtaining a degree in finance, business, or marketing will only put you one step ahead of the game, and help you better manage your future company.
Accounting and finance in business are the fundamentals to success, so get your degree and show the corporate world what they have been waiting for. Check out the top qualification in Spain and come out the other side with your Master in Business Administration Madrid degree to pave your way for the financial global success you have always envisioned for yourself. You will not only gain theoretical knowledge but hands-on practical experience in real-life worldly situations.
The time is now
With an internationally accredited degree in hand and being well-versed in the simplicity of Activity-Based Costing in the financial world, you can only go up and the global stage is ready and waiting. Business savvy may come naturally, but a Master’s Degree is recognized on a global front.
