Activity‐based Costing: An Emerging Tool for Industrial Marketing Decision Makers

Abstract

Activity‐based costing (ABC) is widely proclaimed to be revolutionizing the way in which costs are allocated in business. Instead of allocating overhead costs on volume‐related bases ABC allocates costs directly to products based on activity “drivers”. Since it is activities which “drive” costs, the belief is that understanding what causes costs will provide a more accurate measure of the true cost of a product. This has direct application to industrial marketing decision making, but the marketing literature is virtually devoid of its mention. To fill this void this article first describes ABC and shows shows how changes in the cost structure of US industry have led to the need for a new approach to cost allocation. Next, presents case histories which describe the payoffs which have accrued to industrial marketers who have pioneered in the application of this new method. Then, outlines procedures for implementing ABC. Finally, presents numerical examples which demonstrate the effect of ABC on cost allocation and profits.