Best Activity Based Costing Software

Traditionally, manufacturers used the absorption cost method of allocating costs. This approach calculates the full amount of manufacturing overhead costs and spreads it evenly across the volume of all products. However, this method doesn’t consider that the production of some products may not necessarily be related to some activities. Activity-based costing (ABC) solves this problem.

Let’s illustrate with an example. Company XY Shoes is launching two lines of running shoes. Shoe A is cheaper to manufacture than shoe B but requires extra time from factory supervisors. If we do full costing, the total cost of overhead will be divided equally between both and shoe B will end up absorbing costs from shoe A. Activity-based costing addresses this issue by allocating the relevant costs to shoe A and not to shoe B, therefore revealing realistic production costs.

Ensuring that all lines are accounted for can be very time-consuming and practically impossible for medium and large manufacturers. Manual processes also increase the risk of human errors. This is why activity-based costing software is so helpful.

Activity-based costing (ABC) software is mostly used in manufacturing industries, since overhead costs are a large part of production costs.

Here are some examples of industries that use ABC software:

• Companies producing custom materials: Different equipment or personnel are often needed to handle specific requirements. As factories become more automated, some of these costs may not be accounted for without activity-based costing software.
• Small manufacturers: Small businesses often struggle to capture accurate overhead costs during their growth phase. ABC software ensures that indirect costs are accurately accounted for from the start.
• Automotive: Many automotive companies (for example, Ford) use ABC software to determine costs and pricing. This enables the organizations to save hundreds of millions of dollars in costs by eliminating inefficiencies and redundant steps in production.
• Food and beverages: Companies like Coca-Cola and Unilever use activity-based costing software to track costs across extensively diverse cost lines.
• Service companies: ABC costing can be applied to service companies by focusing on finding service products’ profitability analysis and product costs as a basis for price setting. Examples of this application include the realms of financial services, healthcare, and insurance.

Activity-based costing software can be applied as a versatile tool across industries and verticals. It has become increasingly important for companies to track costs accurately and to manage them properly. Both manufacturing and service companies can benefit from advanced costs management by implementing activity-based costing software.

Activity based costing software simplifies the accurate allocation of overhead costs across multiple cost lines. There are a number of benefits from using this type of software solution:

• Realistic costs of manufacturing for specific products: The software shows the differences in costs between two products that have the same materials and direct production hours, enabling you to find the true cost for each product.
• Allocates manufacturing overhead accurately: By focusing on each activity separately, the system enables you to look at the indirect costs related to each product.
• Monitors and detects processes allowing for the identification of inefficiencies: The system automation creates a loop for monitoring and reporting, enabling users to spot inefficiencies and allowing them to fix them quickly.
• Compares costs with profits, determining accurate product profit margins: The software improves costs calculations and, by comparing costs with profits, ensures exact profit margins for each product.

Choosing the right activity-based costing software can have a big impact on the monitoring and controlling of business costs. Here are some features you should look for:

1. Accurate auditing and reporting: Activity-based reporting software should help your business keep track of different cost lines. This will help you know exactly where the money is going for every activity. Additionally, reporting and auditing may be required by authorities for compliance purposes. The ability to report on all stages helps to simplify a complex model.
2. Revenue and cost comparison system: You should know how your costs are bringing in profits. So a good feature for activity-based comparison software to have is the capability to compare revenue and costs, creating cost and profit reports.
3. Database integration: This feature means you will be able to pull data easily for quick cost analysis. Your activity-based costing software thus will be integrated with the data collected into the database from the entire business operation, keeping a detailed and accurate tracking of costs.