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2 min demo: Activity Based Costing


Watch this video to see how CCH Tagetik’s flexible built in Allocations engine can be leveraged to automate Activity Based Costing in order to achieve a more accurate measure of indirect costs as well as product/service profitability.


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Transcript

CCH Tagetik non-prescriptive approach gives organizations the flexibility to use activity-based costing to plan an account from more accurate indirect expenses beyond traditional allocation methodologies.

On this sample form we have the ability to set up new allocation pools, which really aims to break down the activities required to manufacture a specific product or provide a specific service.

For each activity we are able to specify the driver that will define how we'll be measuring that activity, for example machine restarts are managed based on the number of set ups, and to finish off our first step of activity-based costing, we can simply define percentages that will drive how the total overhead is initially allocated to these activity pools we've defined.

Once our activity pools have been mapped out, we now start the second step by assigning these activities to the products we manufacture or the services we render.

The key here is to identify how intensive each product is for each activity, meaning for example how many units of 'machine restarts', each product is using.

In this example, for instance, we're seeing that monitors requires machine restarts once every 100 units produced, while video projectors, being a more intensive build, requires restart 80 times for every 100 units built.

When clicking on save, our activity-based costing allocation engine is triggered to assign overhead expenses to each product.

In this example we're seeing that for monitors were allocated about $20.000 to machine restarts, while for video projectors were allocated nearly $100.000 for the same activity, even if were selling considerably less units of projectors than monitors.

This is the exact benefit of ABC, while in traditional allocation we would have assigned overhead expenses to the product that sold the most units, in this case monitors, with activity-based costing we're focusing on the true cost associated to each product or service using how resource-intensive they are.

This ultimately gives us a more accurate measure of the indirect cost.

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