More long-term oriented
The four activity terms above can be seen in relation to the more static contribution margin model, that only operates with two levels: Either the costs are variable or not.
Variable costs are in the contribution margin model exclusively defined with outset in the specific product unit, where ABC operates with series, product types and company specific levels, meaning that more costs can be distributed and fewer costs are classified as capacity costs. Business preserving activities are the ABC equivalent to capacity costs:
More true and fair
The positive idea is that the distribution carried out in ABC is somewhat more true and fair than the one carried out through, for example, the full cost model. Product costs that are independent of the production volume (product development and design for instance) will be distributed onto the particular products in the full cost model. This process gives the impression that the cost is dependent on the amount produced. In ABC, these costs, would on the other hand, be distributed onto the series, product type, or company levels.
After the company has established a sound connection between the cost pools and the activities, it has to identify a linkage between the activities and the cost objects. This is found by using cost driver. Cost drivers can be compared to the units of use, and express how much a cost object draws on a given activity. A cost driver has a direct influence on how much a given resource is drawn upon; e.g. the number of invoices (cost drivers) has a direct connection to how much a given accounting employee (cost pool), who is in charge of billing (activity), is utilized. The cost driver for a mechanical engineer (cost pool) who re-calibrates machines (activity) for new production series, could be the complexity of the calibration for a given series.
ABC and the full distribution cost model
ABC and the full costs model differ from each other on the following points:
o ABC does not have the ambition of distributing all costs, as some activities are considered business preserving activities. This principle is in opposition to the full cost model, which seeks to distribute all costs.
o ABC operates with four different types of cost objects (units, series, product types, and company) while the full cost model only distributes costs at the unit level.
o ABC proposes a less arbitrary distribution key than the full cost model; i.e. distribution keys considered draw on real resources.
o ABC only distributes the indirect variable costs to a certain extent.
ABC and the margin contribution model
In relation to the margin contribution model, some substantial differences are worth drawing attention to:
In the margin contribution model, variable costs are defined on the unit level. Furthermore, ABC defines variable costs (by activities) on series and product levels. From the ABC perspective, this application method means that the capacity costs in the contribution margin model embrace both series, product, and company activities. In this way, ABC has the possibility of distributing more costs as (partially) variable and thereby decision-making relevant. A comparison of the ABC, the full cost model (FC), and the margin contribution model (MC) is shown in the table below:
ABC provides certain guidelines for how the distribution keys are set up, in line with activity categorization, and cost drivers (even though there still is a great difference between the specific implementations). The contribution margin model is not that specific in comparison, meaning that from a margin contribution perspective the ABC is only one way of determining distribution keys. The ABC focus on activities means that the model is suitable for cost minimizing, where the non-value creating activities are liquidated.
As ABC treats series and product level so specifically, the model becomes more long-term oriented than the margin contribution model's focus on the particular product's margin contribution. This focus makes it difficult to handle events such as replacement of product types, which are typical long-term initiatives.