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Performance Management Best Practice

Profitability Analysis Using Activity-Based Costing

by Priscilla Wisner

Making It Happen

To conduct an ABC analysis, organizational data are needed about costs incurred, work performed, and the cost objectives (for example products, customers, markets) of the analysis. An ABC analysis can be done for one department, for an entire manufacturing operation, or for the whole organization. However, it is often an advantage to start with a smaller-sized project (a single department or a plant) as the learning curve is steep.

1 Gather the cost data from the general ledger or other financial records. Segment the data into cost pools, whereby each cost pool represents a related set of costs. For example, a maintenance cost pool might consist of maintenance labor costs, supervision, tools and equipment used for maintenance, and training costs for maintenance workers.

2 Define the activities of the business (what work is performed), using the following framework:

  • Facility-level activities: Those related to overall operations (for example management, human resources, security, legal).

  • Cost-object level activities: Activities that support a product (for example design, testing, engineering), or a customer (for example order processing, shipping, technical support), or a market (for example advertising, sales support).

  • Batch-level activities: Activities related to a batch, equally and at the same time (for example set-up, material handling, inspection).

  • Unit-level activities: Activities performed for each unit of activity (for example direct labor).

Once the activities of work are determined, assign the resource costs to the activities.

3 Assign the activity costs to the cost objectives (product lines, customer, markets, etc.) according to the cost object’s use of each activity. Determining the allocation basis requires process knowledge and transactional data; often statistical analysis can be used to verify relationships between transactions performed and costs incurred.


An ABC analysis requires an in-depth evaluation of an organization’s processes and activities, which in turn enables an allocation of costs that better reflects resource usage. Conducting an ABC analysis provides financial and operational information to management that facilitates more effective decision-making, thereby leading to improved financial outcomes.


1 Data for this mini-case were reported in Robert S. Kaplan, Kanthal (A), Harvard Business School Case 190-002, 1995.

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Further reading


  • Bleeker, Ron R., and Kenneth J. Euske (eds). Activity-based Cost Management Design Framework: Getting It Right the First Time. Austin, TX: Consortium of Advanced Management, International, 2004.
  • Cokins, Gary. Activity-based Cost Management: An Executive’s Guide. New York: Wiley, 2001.
  • Kaplan, Robert S., and Steven R. Anderson. Time-driven Activity-based Costing: A Simpler and More Powerful Path to Higher Profits. Boston, MA: Harvard Business School Press, 2007.


  • The Activity Based Costing Benchmarking Association (ABCBA) is a group of ABC practitioners who share data and best practice information:
  • The Consortium of Advanced Management, International (CAM-I), is an international consortium of business, government, and academic leaders who work collaboratively on cost, process, and performance management issues:
  • The Institute of Management Accountants (IMA) is a global organization that “provides a dynamic forum for management accounting and finance professionals to develop and advance their careers through certification, research and practice development, education, networking, and the advocacy of the highest ethical and professional practices”:
  • The International Federation of Accountants (IFAC) is a global consortium of accountants that promulgates standards and publishes articles and papers on topics of interest in the accounting and finance disciplines:
  • The Management and Accounting Web is dedicated to education, research, and the practice of management and accounting disciplines. Contains links to dozens of management accounting and finance resources:

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