Intellicosting systems: strategic cost management with Activity Based Costing (ABC)

Design team members: Sean Kirby, Jason Tham, Kevin Wong, Jason Yuen

Supervisor: Professor M. S. Kamel


Modern management practices and continuous improvement methods have drastically changed over the past decade with the increased competitive environment and organizational changes. As organizations aim to improve value created, value-based management within an organization requires a full understanding of how all resources add value to the corporation. Activity Based Management (ABM) is unique among process improvement solutions to improve profitability as it determines what activities really add value to customers and measures the cost of the value added. The Activity Based Costing (ABC) methodology measures the cost and performance of activities, resources, and cost objects. Resources are assigned to activities, and then activities are assigned to cost objects based on their use. The concept of ABC where resource costs are directed to activities is referred to as resource cost assignment. The assignment of costs to cost objects based on their use of activities is referred to activity cost assignment.

Project description

Our objective is the completion of an activity-based and intelligent deduction costing engine that transcends the current solutions available in the cost management niche. Given that ABC assigns costs to activities based on their use of resources, the rational derivation of ABC is based upon the existence of some given or identifiable unit resource cost that must be associated with each resource required by an activity. Clearly, unit resource costing is fundamental to ABC, and brings about two vital problems relevant to ABC:

1. What unit resource costs are associated with a resource?

2. How does one deduce resource costs(s) so that direct, indirect and overhead costs are accounted for within the costs of a resource?

We address these two fundamental questions in our study by exploring the theory of resource cost units and enterprise modeling. The algorithms developed will be implemented and demonstrated in a software application. The designed algorithms and software application will then be used in two case studies to prove its viability. For reasons of proving application broadness and viability, two real-world case studies involving manufacturing and medical service sectors are examined.

Design methodology

Our design methodology consists of fully describing the behaviour of our chosen theoretical model of the enterprise (Enveloped Activity Based Enterprise Model) such that a software package can be implemented to answer questions concerning the costs associated with enterprise resources. Objects in the model include resource, activity and state objects, which are chained together in tree-like structures to form activity-state clusters. These activity-state clusters then provide the links between objects, which allow an accurate picture of the actual cost of resources within the enterprise to be determined based upon a set of basic equations.