Activity-Based Costing — Estimating the Work Behind a Process

A departmental budget shows what a team spends. It may not show how much work is required to process one invoice, prepare an order or handle an exception. Activity-Based Costing, or ABC, provides a way to examine that work and allocate its costs.

The resulting estimate depends on the data and allocation rules. It is not a universal benchmark for what a process should cost.

From resources to activities to cost objects

ABC first assigns resource costs to activities. It then allocates activity costs to products, services, customers or other cost objects according to the activities they consume.

For example, a small custom order may require its own setup, checks and customer communication, while a large repeat order shares those activities across more units. An allocation based only on production volume may conceal that difference.

A cost driver represents the factor used to assign an activity’s cost, such as the number of setups, orders or service visits. Choose a driver that reflects the work and document its limitations.

An illustrative invoice calculation

Suppose a company estimates that one invoice requires 12 minutes of active handling. If the relevant resource cost is PLN 90 per hour, the direct handling estimate is:

12 ÷ 60 × PLN 90 = PLN 18 per invoice.

At an assumed volume of 2,000 invoices a month, that activity represents PLN 36,000 of monthly resource cost. These are illustrative inputs, not a reported client result or a market benchmark.

The model still needs to consider exceptions, shared system costs, supervision and the basis used to calculate available capacity. Elapsed time from receipt to payment is not the same as active staff time.

Time-Driven ABC

Time-Driven ABC uses a capacity cost rate and estimates of the time required for activities. Different case types can require different amounts of work: a straightforward invoice and one with missing information should not automatically receive the same estimate.

Time estimates can come from observation, representative samples or suitable operational records. System timestamps can help, but they often measure waiting as well as active work. They should not be treated as labour time without checking what each event means.

What an activity model can reveal

A model can help compare service patterns, investigate repeated corrections and identify activities that consume capacity. For example, frequent small orders may require more handling per unit than occasional larger orders.

The analysis does not establish that a fixed percentage of customers is unprofitable. Conclusions need the company’s own revenue, margin, activity and allocation data, including an understanding of costs that would remain even if an activity changed.

Released capacity is not automatically a cash saving

If an improvement reduces manual handling, the business may gain capacity. That becomes a cash saving only when expenditure changes; alternatively, the capacity may support more output or better service.

Separate fixed costs, variable costs and opportunity costs. Avoid counting the same benefit twice, for example as both reduced staff expenditure and additional work completed by the same staff.

An investment comparison should include implementation, licences, operation, maintenance and adoption. NPV and IRR can help examine the timing and uncertainty of cash flows.

Combine costing with process evidence

Process mining may show recorded paths, loops and waiting periods where suitable logs exist. Interviews and observation can explain why work happens and how much effort it requires.

ABC can add a cost perspective to that evidence. It does not require every project to use process mining, and an apparently precise spreadsheet is not evidence that the underlying estimates are accurate.

How to start

1. Choose a process and a decision the analysis should support.
2. Define the main activities and relevant case types.
3. Identify resource costs and an appropriate capacity basis.
4. Collect representative activity measures and record assumptions.
5. Test how the result changes when uncertain inputs vary.
6. Compare improvement options and measure the outcome of any change.

Within Q-Journey, AiP can examine business processes through an individually agreed audit scope. Express and Platinum are the available variants; Platinum includes Lean and Muda consulting. No fixed costing method or financial deliverable is implied for every project.