The Importance of ABC Models in Cost Management

The end of the 1990’s marked the beginning of new management era. Organizations such as CAM-I (Computer Aided Manufacturing-International, later renamed to Consortium for Advanced Management-International) and the National Association of Accountants had introduced Activity-based costing - a cost accounting technique which charges organization’s indirect costs to the activities that cause the costs to be incurred and then distributes costs of activities to the products that cause the activities to be performed. Activity-based costing as a management tool has proved its relevance and found its proponents among academics and managers. Introduction of the time aspect into Activity-based costing proved that it is still attracting attention and undergoing development in order to become more accurate. The paramount goal of the implementation is to prove the increased effectiveness and superiority of cost management when using Activity-based costing. It will be achieved by allocation of overhead costs to products with the intention to determine unit costs. This process of allocation will increase the reliability of cost information and improve the information base for product decisions. Moreover, we expect that this approach will more or less alter the profit margin of individual products. This kind of information is very useful when evaluating price-related or keep/drop decisions.