An impartial analysis of overall operations can tell you yes or no.
How do you know if activity-based costing (ABC) would be right for your company? There's an objective way to decide before your company takes the plunge. For ABC to be effective, a majority of all costs incurred by a significant unit of a business must be analyzed systematically. These costs include not only most fixed and variable factory burden costs, but also some fixed and variable marketing and administrative costs. Implementation of ABC requires a complex, comprehensive process that is costly and time-consuming, so naturally managers would want to be assured of the advantages before embarking on the implementation of ABC.
The potential benefits of ABC can be analyzed in advance along two separate dimensions. The first is based on the probability that, in a given application, ABC will produce costs or other results that are significantly different from ones that could be generated with more conventional or less costly methods.
The ABC-generated costs may or may not be "better" or more accurate, but they are different in amount. The second dimension of the model seeks to establish that, given that cost information generated by ABC is indeed different, management will use it for significant decisions. Managers must regard ABC information as superior, and the nature of the organization and its competitive, legal, and social environments must allow managers to use the information freely.
The factors involved in the first dimension include the number and diversity of products or services produced, the diversity and differential degree of support services used for different products, the extent to which common or joint processes are used, the effectiveness of current cost allocation methods, and the rate of growth of period costs. The factors involved in the second...