As we have already discussed, activity based costing lets you measure the expenses certain process generates. This in turn helps in assessing either any alternative is necessary in terms of materials, methods or entire procedure. It also helps in determining the sales price for end or byproduct.
Although you may have the expenses measured in total, say on maintenance we used before 10,000 EUR, it still needs to be split onto measurable units. Now this part is way trickier than collecting all related expenses together. In order to do this, you need to follow the next steps.
First off you need to decide on your products – either groups or separate unique ones. Defining them may become a huge challenge in case there are hundreds of variations like, depending on the product obviously, color, thickness, surface, extra add-ons etc. Eventually it all affects the end result as well. In case of many what would seem similar products and with no real cost difference, they can be easily grouped together. Having fewer products makes building up the model for ABC costing way easier.
Now that we have expenses collected, products decided, we move onto splitting the expenses. Before we can do it however, it may also be possible (making things easier in my opinion) to have sub products, which helps in splitting the expenses. If it is not possible, you can skip this part, however, the method of splitting stays the same nevertheless.
Generally speaking expenses for certain period are simply divided onto units produced in this very same period. Depending on the size and consumption, some steps of the production process may give different contribution to the cost price of the product (i.e. a bigger chair with leather surface instead of cloth surface may require more attention hence is more expensive). Having sub products may help in determining the price better in some phases as the material inflow to the process has a determined price already.
Building up the ABC model is lots of work, however once done, is a real tool to make the production more effective, decide on the better selling price etc.