How does the Activity-Based Costing System Work?
Traditionally, managers analyze financial accounting or conventional management results, and often make decisions on cost reduction after examining cost and expense line items in the company’s profit and loss statement. The idea is to reduce the most representative line items, generically grouped, without considering the impact this may have on activities that are critical in attaining company goals. This approach focuses on controlling inputs, without paying any attention to the activities consuming these resources. On the contrary, ABC provides managers with information about activities, letting them know how much it costs to perform each activity and the most likely causes of activity costs. To illustrate the above let us examine one of the three Latin American companies mentioned at the beginning.
