Activity-based costing
Activity-based costing in Panama
Almost every company allocates its indirect costs in proportion to sales. It is convenient and it is false: the product that sells most is not the one that consumes most resources, which is why the margin the accounts show is rarely the real margin.
DB Consultants Group carries out activity-based costing studies for companies in Panama that need to know which product, which service and which customer actually make money.
The problem
Why traditional costing misleads
Traditional costing allocates indirect costs using a single base — sales, labour hours, units — and assumes every product consumes the structure in the same proportion.
In practice it does not. A low-volume product can absorb twice the dispatch time, purchasing effort and after-sales attention of another that invoices five times as much. Activity-based costing asks first which activities each product, service or customer consumes, and only then allocates the cost.
The result tends to be uncomfortable: there is almost always a line the company believed was profitable and is not, and another one carrying the rest without anyone knowing.
What it reveals
The questions it answers
Profitability by product
Which one really leaves a margin, with the structure allocated according to what each consumes, and which one survives only because another subsidises it.
Profitability by customer
The large customer who demands partial deliveries, special terms and constant attention can cost more than they contribute.
Cost to serve
What it costs to serve a channel, a region or a type of order. It is what allows minimum order sizes and dispatch policies to be set on evidence.
Idle capacity
What share of the structure is not being used. That cost belongs to no product, and loading it onto one distorts every pricing decision.
The process
How the study is carried out
- Activity mapWhat each area actually does: buying, storing, producing, dispatching, collecting, servicing. It is built with the people who operate, not from the org chart.
- Cost of each activityThe structure is distributed across the identified activities, including staff, space, systems and equipment.
- Cost driversWhat measures the consumption of each activity: number of orders, of order lines, of deliveries, of visits, of SKUs. Choosing the right driver is half the work.
- AllocationActivity costs are carried to products, services and customers according to their real consumption.
- Results and decisionsReal margin by product and by customer, and the measures that follow: prices, minimum order sizes, mix, discontinuations.
Four to eight weeks, depending on the number of lines and the quality of the operating records. The firm carries out activity-based costing studies on a recurring basis; see the note on the annual portfolio analysis for a Panamanian pharmaceutical laboratory (in Spanish).
Deliverables
What the client receives
- The real margin by product, service and customer, ranked from highest to lowest contribution.
- The activity map, with its cost and its driver, which is the part the company reuses every year.
- The costing model in a spreadsheet, open, to repeat the exercise with the next period’s data.
- The decisions that follow: which price to review, what minimum order to set, which line to discontinue and which to push.
- A presentation session for management or the board.
Warnings
Mistakes when implementing activity-based costing
- Too many activities. A model with a hundred activities cannot be maintained. Between fifteen and thirty well-chosen ones explain almost everything.
- Drivers nobody measures. If the data does not exist in the operation, the driver is theoretical and so is the result.
- Spreading idle capacity across products. It artificially inflates the cost of what is produced and leads to raising prices where they should not rise.
- Doing it only once. The value appears when it is repeated and can be compared against the previous period.
- Not turning it into decisions. A study that does not change a price, a minimum order or a mix stopped halfway.
Common questions
Frequently asked questions
What is activity-based costing?
It is a method that allocates indirect costs according to the activities each product, service or customer actually consumes, instead of spreading them with a single base such as sales or units produced.
Does it work for a services company?
Yes, and it often contributes more than in a manufacturer: in services almost all cost is indirect, so traditional allocation distorts the margin even further.
How long does a study take?
Four to eight weeks, depending on the number of product lines and the quality of the operating records.
Do we have to change our accounting system?
No. The study is built in parallel, drawing data from the accounts and from the operation. If the company later wants to build it into the system, the map is already done.
What information is needed?
Financial statements, detail of expenses by area, volumes by product and by customer, and operating data: orders, deliveries, SKUs, visits.
Can it be reconciled with the group’s cost accounting abroad?
Yes. The study is built in parallel to the accounts, so it can be presented alongside the group’s cost structure, with the differences in allocation criteria set out explicitly rather than buried in the numbers.
Can it be repeated every year?
Yes, and that is where the value is. The model is delivered open so the company can update it and compare against the previous period.
Is the engagement confidential?
Yes. The nature of every engagement is confidential and is not disclosed without the client’s written authorisation.
Let’s talk about your costs
A first conversation is enough to establish what operating data exists and estimate the scope. It is confidential and commits you to nothing.