Understanding your ABCs (Activity-Based Costing)

A great buzz phrase in mobility/rehab industry circles is “activity-based costing,” billed as a critical component in creating and maintaining a profitable service/repair department. So what exactly does activity-based costing mean?

 Activity-based costing (ABC) was born in the late 1980s, when business scholars such as Robert Kaplan began writing about ways that a manufacturer could assess its business by more accurately assigning its overhead costs to specific products or services within the company. Simply put, ABC is a way to determine how much each particular service, product, department, division, etc., is costing the company to provide — because not every service, product or department has the same actual overhead costs.

ABC is especially critical to a service/repair department, which has so many intangible costs, such as long-term inventory, service calls, repeated deliveries and trips to homes to make adjustments, and highly skilled technicians doing highly individualized work. Without understanding his company’s ABC, a supplier may not know, for instance, if certain brands and models of power chairs are more expensive than others because they require more frequent repairs or because technicians and customer service reps have to make more calls than average to secure replacement parts.

 For a basic online look at activity-based costing presented by Narcyz Roztocki and the University of Pittsburgh, go to www.pitt.edu/~roztocki/abc/abctutor/.

This article originally appeared in the October 2007 issue of Mobility Management.

About the Author

Laurie Watanabe is the editor of Mobility Management. She can be reached at lwatanabe@1105media.com.

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