The author was tasked with setting up an activity based costing (ABC) system for a not-for-profit organization. The first thing done by the author was to use the internet to research the use of ABC systems for non-profits. The result was the conclusion by the author that QuickBooks’ class feature could be used to track expenses, revenues and balance sheet costs for the implementing ABC. Income, Revenue and Balance Sheet reports are then prepared by class to see the result.
Once the decision was made to use the class feature of QuickBooks, the author determined that the ABC system should accumulate costs into activity cost pools designed to correspond to the non-profit organizations major activities or business processes.
The author determined that the costs in each pool would be largely caused by a single factor – the cost driver. In activity based costing (ABC), an activity cost driver is something that drives the cost of a particular activity. A factory, for example, may have running machinery as an activity.
The activity cost driver associated with running the machinery could be machine operating hours, which would drive the costs of labor, maintenance and power consumption of running the machinery activity. From his research, the author found there are currently no comprehensive manuals to provide off-the-shelf instructions on how to install an ABC system in an organization. Each set of programs and activities, as well as each type of cost, presents different issues and problems.
The author anticipated that many of the allocation issues faced by a not-for-profit would be similar to those faced by industry implementing an ABC system. On the other hand, the author determined that flexibility is the essence when implementing an ABC system in a not-for-profit organization. The purpose of ABC should be to provide decision-useful information, not to develop a pure measure of costs. ABC can provide interesting insights into the costs of programs and activities. ABC may highlight changes that have taken place gradually over time of which the manager may not be aware.
The rational for using ABC is to allocate indirect costs to goods or services based, not simply on what is convenient, such as direct labor, but on the factors by which they are most influenced. Costs of support services should be allocated on the basis of the factors that most directly affect their magnitude. As demand for increased accountability becomes more intense for an organization, such organization must demonstrate that the benefits of the programs and activities in which they engage are commensurate with their costs. Accordingly, not-for-profit organizations need accounting systems that properly measure and report these costs.