PRMG 090 ‐ Online Delivery

CCC/CCE preparation

8. Activity Based Cost Management

ABC/M transforms spending expenses on resources (e.g.,

salaries) into “calculated” costs of work activities and processes
and then into products, service‐lines, channels, and customers;

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CCC/CCE preparation

Overhead Expenses are Displacing Direct Costs

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CCC/CCE preparation

The primary cause for the shift is the gradual spread in products
and service lines. Organizations have been increasingly offering a
greater variety of products and services.
Organizations have been servicing more and different types of
customers.
 Introducing greater variation and diversity into an organization
creates complexity, and increasing complexity results in more
overhead expenses to manage it.

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CCC/CCE preparation

Expenses must be distinguished from costs.

1. All costs are calculated costs.
2. Expenses occur at point of acquisition with third parties, including
employee wages.
3. When money exits the company, the “value” does not change.
4. From expenses, all costs are calculated representations of how
these expenses flow through work activities.

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CCC/CCE preparation

Chart‐of Accounts
1. Translate the work activities into a general ledger of expenses.
2. ABC/M is viewed for analysis.
3. ABC/M is starting point for calculating costs for both processes
and diverse outputs.
4. ABC/M resolves deficiencies of traditional financial accounting.
5. ABC/M is work‐centric.

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CCC/CCE preparation

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Difference between ABC/M and the General Ledger and traditional 
cost allocations.
1. ABC/M Describes activities using an action‐verb grammar convention, 
such as inspect defective products.
2. General Ledger uses a chart of accounts.
3. ABC/M uses a chart of activities.
4. Chart of Accounts is inaccurate for reporting business process.
5. General Ledger is organized around separate departments or cost centres.
6. General Ledger uses mapping to its hierarchical organization chart.
7. General Ledger describes what was spent.
8. ABC/M describes what it was spent for.
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CCC/CCE preparation

ABC/M is a Cost Re‐assignment Network
Three modules connected by cost assignment paths.
1. Resources: Capacity to perform work. Traced to work activities.
2. Work activities: Where work is performed. Assignment to cost
objects.
3. Final cost objects: Broad variety of outputs and services where cost 
accumulated.

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CCC/CCE preparation

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