Executive Summary

 Traditional cost allocation methodologies in firms can provide misleading information

about the profitability of products, product lines, customers, and markets.

 Activity-based costing (ABC) provides more meaningful information about the drivers of
costs, the activities performed in a firm, and the relationship between costs and products,
customers, markets, and segments.

 In addition to supplying more detailed and better cost and profitability information, an
ABC analysis enables managers to evaluate processes from an activity viewpoint, leading to
identification of non value-adding activities and process inefficiencies.

 ABC does not change overall profitability in a firm; it better aligns cost assignment to the
causes of those costs.

 With better information, better decisions can be made in a firm to improve profitability—
this is the power of ABC.

 Using ABC systems to improve financial management is called activity-based

management (ABM). The goal of ABM is to improve the value received by customers and, in
doing so, to improve profits.

 The key to ABM success is distinguishing between value-added costs and non-value-
added costs.