January is costing the car

Customer margin ABC costing

No enterprise can survive without ensuring consistent financial support for its products and services. This goal is called the leveling of product margins. For small business owners, activity-based costing, or ABC, methods of accounting can help determine which products are the most profitable to keep offering. The process works by assigning and categorizing the costs of doing each activity. The owner then subtracts those costs from total sales to calculate the product margin needed to make decisions.

Step 1

Conduct a preliminary analysis of all activities needed to carry out the business's major functions. For a small shop, this study can focus on a single department or unit. Classify tasks as primary or secondary, or revenue-enhancing or administrative, respectively, and as value- or non-value-adding activities.

Step 2

Gather information on all activity-producing costs and services. Examples include equipment and machinery, office equipment, research and development costs and salaries. Analyze each activity's costs and where they originate. Add the amounts together, which yields each activity's total input cost.

Related Reading: How to Improve Sales Margins

Step 3

Divide operations into activity centers. Pay special attention to support activities, which are defined as overhead costs. Examples at a small mold shop might include administrative, buildings and grounds, purchasing and supervision expenses. These are the opposite of direct activities that generate profits for the business.

Step 4

Create cost pools for each group of activities and distribute these pool costs to the business's total objectives. Identify reasons, or drivers, for each supporting activity. Using a calculator, divide the total product cost by the total number of units. This provides the total overhead cost per unit, which will figure in any production decision.

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NAB Lifts Cash Profit 7% To $1.6 Billion But Revenue Is Down  — Business Insider Australia
This was partially offset by higher lending balances and a broadly stable customer margin.

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