The method of Activity-Based Costing (ABC) was developed primarily for solving problems which emerged from traditional cost management systems. Troubleshooting in the management of companies throughout the late 70's and especially the early 80's held a constant presence.

The problems generated were mainly from the traditional cost accounting systems' way of functioning which provided the management with inaccurate data. Where the old cost accounting systems failed badly was in supplying the company's management with inappropriate information in order for crucial decisions to be taken in the correct and true perspective of a given company's true position in its market territory. Since this currently accessible "itemized" information could not be provided to a company's decision making sector, the information provided had an impact which of course distorted the decision which would have otherwise been taken in the light of different and more accurate information.

This misinformation had an adverse impact on a multitude of managerial decisions especially in the multi-product firm sector in respect of long-term, mi

Batch- level activities. These could include things such as placement of purchace orders, shipments to customers. Costs at batch level are dependent on the number of the batches produced rather than on the number of units made, or sold. The actual cost of, say, placing an order would be the same for one item or 10,000 items, so the total cost generated by a batch-level activity would be the function of the times an order would be placed rather than on the total quantity of items ordered.

Implementation of activity based costing can take anywhere from 3 to 15 months depending on the size of the company or plant. After the new system is in place, the old accounting system should be disguarded as soon as possible if activity based costing is to be used exclusively.

Product level activity. These are specific and are related to the support of the production of a particular product like for instance special test routines, machine maintainence inventories.

In other words activity based costing pin-points problems by focusing on the activities associated with operating the business. The traditional cost systems haven't the capability to afford this insight, and so do not touch the subject, only in the case of reports that isolate salaries, benefits, and so on.

The optimum accuracy in costing can be attained by recognising four general levels of activities within a company, each of which can be further subdivided into specific cost activity centres. These four are as follows;

The most basic approach is to use activity based costing in conjunction with a company's current accounting system. In this case, software which has been developed over the years for this specific purpose can be bought to help structure the tiering down from the traditional accounting system to a detailed activity based accounting configuration. The traditional accounting system is still used and the activity based costing structure is an add-on or shadow system to be use when specific information is needed for a management based decision. An off line system can allow an organization to improve its cost information without disrupting their current information and financial systems. This is recommended for small firms or as a first step towards full activity based costing integration for a larger firm.

There are various approaches for designing and implementing an activity based costing system. The size of the company and desired outcome must be considered before even thinking about, let alone attempting to make the transition from a traditional cost accounting system to an activity based costing system. Larger firms should consider pilot programs before implementing the new system across the whole organization.

Another important step to implementing activity based costing and getting buy-in at all levels is extensive training. All employees must be educated in the principles and mechanics of activity based costing. Depending on the level of involvement, employees may be trained in the basic concepts of activity based costing, problem solving, information analy

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