Besides contending with the confusing selection of resource drivers and activity drivers, the current ABC user must also contend with the concept of “cost drivers”. Cost drivers are associated with the input of activities towards cost objects. Cost drivers are supposed to reflect what causes an activity to be
performed and what causes the cost of performing the activity to change. An ABC system achieves improved accuracy in estimation of costs by using multiple cost drivers to trace the cost of activities to the products associated with the resources consumed by those activities. Hence, this leads to an ABC user
involved in an “art” towards ABC implementation rather than a “science”. The “art” attempted involves making two separate but interrelated decisions about the number of cost drivers needed and which cost drivers to use. The “art” gets further confusing because the cost drivers selected changes the number of resource drivers and activity drivers needed to achieve a desired level of accuracy.
In summary, the current state of the “art”, or perhaps, better stated as the problems in ABC implementations today have led to the following
1. Based upon the “artful” selection of cost drivers,
resource drivers and activity drivers, “overhead
and indirect costs” get allocated and included into
the cost of a cost object through cost pools.
Replaced/Superseded by document(s)
A company’s profits may be defined as the positive difference between its income revenues and operational costs. Today, most companies use traditional costing methods and/or traditional Activity-Based Costing (ABC) to determine their operational costs with a view to direct operational and business process changes
so that profits are realized. A tripartite approach is presented towards determining requirements and specifications of enterprise information systems for profitability (EISP). In the first part, an understanding of the nuances of traditional costing and ABC as is currently practiced in enterprises is presented to point the shortcomings of these current costing practices. The second part provides a case study that vividly demonstrates the problems in the current costing methods and clearly points their inadequacies towards profitability. The third part presents a framework for the specifications of enterprise information systems for profitability through ontology-based enterprise modeling, EABEM and Temporal-ABC for the attainment of improved knowledge about costs.