Though useful in many industries, activity-based costing is particularly prevalent in manufacturing, construction and healthcare companies. Activity-based costing, or ABC, is practical for companies with diverse customers and diverse sources of overhead cost.
If a company makes nearly identical products, each of which requires a similar amount of attention, ABC likely isn't necessary. ABC is ideal when customer needs dictate that certain products warrant greater administrative overhead and selling costs. Manufacturers use ABC when overhead accounts for a major part of all corporate expenses.
ABC originated in the manufacturing industry when manufacturers moved from labor-intensive assembly lines to greater automation. In the older, labor-intensive system, overhead costs were simple to calculate in terms of man-hours. With the introduction of automation and robotics, facilities required greater capital investment and companies needed a more precise method of measuring costs.
While healthcare companies were once able to raise prices to make up for cost increases, as of 2015, Medicare, HMOs and other managed care organizations cap provider payments, creating a greater need for accurate cost analysis. ABC allows healthcare providers to assign resources intelligently to more cost-intensive services, such as surgery and trauma care. The cost of implementing ABC potentially limits its usefulness in smaller companies.