This memo is in response to your questions concerning ABC Costing and
its benefits to your corporation. The memo will initially explain what ABC
Costing is exactly; it will then go on to address ABC Costing and the
advantages that it will bring to Penny Blossom Manufacturing Corporation
(“PBMC”) specifically. After reading both sections of this memo, it should give
you a better understanding of ABC Costing with respect to PBMC.
What is ABC Costing?
ABC Costing is an acronym for “Activity Based” Costing. ABC costing is a
costing method that is based on the activities that a company engages in and
then allocates indirect costs to products/services. ABC Costing first
identifies significant activities that cause overhead costs in a business. It
then traces those overhead costs to these activities. The ABC method then
requires you to find a cost driver that relates to each activity and
subsequently form a cost pool for each activity. The ABC method flows costs in
a logical method. Activities in a business result in costs for the company.
Production and operation of a business involve activities; these activities
require resources, whether they be monetary or non-monetary.
Advantages of ABC Costing to Penny Blossom
Manufacturing Corporation vs. Departmental Costing
ABC Costing is seen as a more complex and accurate alternative to
Departmental Costing, the only negative being that it is more expensive to
implement. Unlike ABC Costing, Departmental Costing uses a single cost pool and
does not diversify through different activities. This makes it less reliable as
a costing method. Having an accurate costing method gives the company the
ability to more properly predict future profit margins and make financial
Other than the technical differences, Departmental Costing does show
discrepancies in the accuracy of information that it produces. For example,
Departmental Costing may show high profits for products that are difficult to
manufacture, thus profit margins are difficult to analyze and explain.
Lastly, ABC Costing provides a better way for companies to track their
costs. This is especially important as a manufacturing company. By assigning
costs to activities it gives the company a better way to track their usage. By
tracking their usage, a corporation can foresee which activities produce the
most cost, and then find a way to minimize the issue.
Hopefully your concerns have been addressed through this memo. If you
have any further inquiries, please do not hesitate to email me at