Activity-Based Costing Approaches

Activity-Based Costing provides helps assign overhead costs to products, customers, and other
object in a way that is more correlated to cost drivers than traditional overhead allocation
methods. The definition of cross-functional business processes in addition to the functional cost
center standpoint opens a further dimension of overhead transparency in cost accounting.

First, the resources consumed by Business Processes are assigned according to the true origins of
the costs. The characteristic unit of measure for this assignment is known as the resource driver.
In the second step, the business processes are assigned to the assorted receiver objects based on
their actual utilization of resources. The assignment of business processes takes place via
"process drivers", which represent reasonable measurements of business process consumption.
Receiver objects can be products, customers, sales channels, and other types of profitability
segment.

Activity-Based Costing in the SAP System

ABC, in contrast with traditional cost accounting, allows a more realistic profitability analysis of
different products and customers because the resources of overhead areas can also be taken into
account via process consumption by market segments using the business processes.

The primary costs in external accounting appear as primary cost element assignments to the
responsible cost centers. In this way, the cost center structure offers the complete view of
organizational overhead. The resources relevant to the business processes are provided in their
entirety by the cost centers. This means you cannot make direct postings of primary costs from
external accounting on business processes.

Features

In general, we can distinguish between two different techniques used for assigning cost center
resources to business processes (via resource drivers) and allocating business processes on the
corresponding receiver objects (via process drivers). Both techniques are treated here as pure
cost distribution (Push Approach) and as quantity tracing (Pull approach). Deciding for one of
the two approaches has far-reaching consequences for the use of ABC as a management tool in
your organization.
Cost distribution (push) and quantity inputs (pull)

The SAP System supports numerous allocation methods that allow the realization of both
approaches to Activity-Based Costing.

For more information on the methods, see: Pure Cost Distribution Methods (Push Approach),
Method for Quantity Consumption (Pull).