Best Practice: Activity-Based Cost Allocation Strategy

Cost Intelligence: Easy as ABC! (Activity Based Costing)

Last week, we discussed all of the cost allocation strategies. Today, we’re focusing on Activity-Based Costing (ABC), which provides the most accurate and fair analysis of all the cost allocation methods. This strategy tracks activities that have actually occurred, as captured in an authoritative system of record, and then uses those numbers to distribute costs. For example, storage costs are allocated to storage consumers based on the dedicated disk space actually used by each customer.

At Bilanc, we can collect information from any data source, database, or event-tracking system, meaning we can allocate costs at the most granular level.

The system of record created is the final word on what actually occurred. This data is captured from robust applications or databases, and over time it feeds the cost & profitability model in a fully automated fashion.

Would this allocation strategy fit your company?

Most companies should choose ABC if they are concerned with allocating costs accurately and fairly, interested in improving their cost management, and are able to collect usage data. This method works well for companies focused on accuracy because each business unit can be assured that costs are being divided fairly, not by mere estimation or guesswork. It ultimately favours a collaborative approach to cost optimisation and profit maximisation across the business.

However, collecting usage data is the biggest challenge to implementing this strategy. It can be difficult to determine where and how to obtain this data, and how to maintain and automate its upload into the financial model.

Bilanc’s platform addresses these challenges by automating the collection and integration of data from any source into the financial model. We will continue to expand further on how we help you demystify spending, allowing you to strategise on future investments and enhance overall business performance.

Key Benefits of ABC with Bilanc

• Enhanced Accuracy: By using actual usage data, costs are allocated more precisely.

• Fair Allocation: Each business unit gets charged based on their actual consumption, promoting fairness.

• Improved Cost Management: Detailed insights help in identifying areas for cost reduction.

• Automation: Reduces manual work and errors, as Bilanc’s platform handles data collection and integration seamlessly.

• Scalability: Suitable for businesses of any size, as the system can handle data from various sources.

Conclusion

Activity-Based Costing (ABC) is an essential strategy for companies aiming for precise and fair cost allocation. While the initial challenge lies in data collection, platforms like Bilanc simplify the process, ensuring accurate and automated cost distribution. Adopting ABC with the right tools can lead to better cost management, informed decision-making, and ultimately, enhanced profitability.

Explore how Bilanc can help your business achieve these benefits and transform your cost allocation strategy today.