Hi,

I'm required to introduce Activity Based Costing in Finance branch of a Government Department. Does anyone know what Activity Drivers can be used for non-transactional based activities, such as preparation of Budgets, Annual Report, or other Accounting "common activities".
The way system works is the following: Finance Branch is divided into Functional areas (Accounts Payable, Accounts Receivable, Financial Accounting, System Management and Management Accounting). For each Functional area the list of activities had been produced. As a first step the cost of resources (mainly salary) is allocated to the activities. As a second step, the cost must be allocated to Business Centres by Activity Driver.

For the activities like AP/AR processing choosing a driver is straightforward, however assigning a driver to more generic activities like preparation of Financial Accounts, Budgets and Annual Reports is a very challenging task. Does anyone know what Activity Drivers can be used in those cases other than equal allocation to Business Centres?

I'd appreciate any ideas.

Thanks a lot,
Tatiana

appsconsulting

Hi Tatiana

You are right about applying Activity Drivers to those activities like finalizing accounts etc. Normally these activities are treated as 'business sustaining costs' and not taken to any function, product or customer. ABC is based on the concpet of 'cause and effect' and there is no such relationship.

having said that there are some organizations that believe on 'fully allocated cost' (FAC), there they have to take each cent to certain cost object. In that case those costs can be taken with any logic to the cost centers as any base could be a good or bad base to take costs to the destination.