This week’s episode of Conversations with Kip continues the allocation series, discussing activity based costing, and how activities can be the drivers for allocating costs to other metrics.
Activities in allocation processes, are drivers of cost or at least have some relationship to costs. For example, employee costs are paid in the form of salaries and wages. But what the employees do during work are the activities we might wish to measure. In some instances employees are paid for the activities, like when they are paid per unit assembled. In other cases though, wages are fixed, and the activities have no bearing upon the costs. Things an employee might do include repairing things, words typed per minute in the old-school word processing pools, square feet of a building cleaned or painted or constructed.
The same can be true for cost of a piece of equipment, which might be either the purchase or lease price, but not reflect what the machine actually does.
If we can gather data on these kinds of activities, it is useful to divide costs by these types of drivers, to know what is the cost to repair some item, or produced something. Activity data is often called the “driver’ of costs.
We have developed fairly good systems for tracking monetary resources and keeping that data over time at least in some fashion; but our systems to track activities have lagged behind. Activity data often spills out of any system that might have it, if it was tracked in the first place. Formats change, data is lost, systems go down and corrections to the data are not made. Getting good activity data is typically much, much harder than getting the cost data to begin with.
The benefits of having this data, and an accurate allocation system though are evident often in making projections of costs over time, measuring efficiencies and the impact of improvements or detecting needed maintenance, and generally improving performance of whatever it is we measure.
Prior Episode in Allocation Series: Complexity of Allocation Processes
Next Episode in Allocation Series: Allocation Processing Steps
Watch all episodes in order on the Conversations with Kip Playlist