Much of what we read about Activity Based Costing talks about using ABC as a full-on accounting system. However, it is important to note that you don't have to implement an ABC accounting system to benefit from ABC concepts. You can use accounting information and ABC concepts to analyze and evaluate situations to support better decision-making. Take a look at this situation and think about how ABC concepts could have helped.

 

Some years ago, I was asked to take a look at a situation in which a planetarium/discovery center was losing money. The facility consisted of a planetarium, a kid's discovery center, a large conference room, several small meeting rooms, and a restaurant. 

 

The restaurant was contracted out to a concessionaire. The restaurant operator earned and kept all of the food service revenue and then made the contractual payment to the planetarium. Word around town was that he was making a lot of money! However, the planetarium was losing a lot of money. Of course, there were a lot of complicating factors, but the restaurant contract simply stated that all utility costs would be allocated based on square footage: Electricity, water, and cooking gas costs were allocated between the planetarium facilities and the restaurant. 

 

Can you see what's wrong here? How would an understanding of ABC concepts help develop a better contract as to how utilities are allocated? (Hint - how much cooking gas does the planetarium use?)

Answer rating: 100% (QA)

Absolutely the situation youve described highlights a clear need for Activity Based Costing ABC concepts to better understand cost drivers and allocate costs more accurately In this case ABC could hav... View the full answer