Why activity-based costing (ABC) matters to a first-time founder
A single overhead rate tends to make simple, high-volume products look more expensive than they are and fiddly, low-volume ones look cheaper. If you price from those numbers, you may be undercharging for the awkward orders and losing deals on the easy ones because your quotes are too high. Ignore how overheads are really used and you can end up chasing growth in exactly the customers who lose you money.
Examples of activity-based costing (ABC)
A small bakery has ¥6 million of yearly overheads and shares them by volume. It makes 100,000 standard loaves and 20,000 custom cakes, so every item carries ¥50. Looking at activities, ¥4 million of the overhead is decorating and order handling, used only by cakes, and ¥2 million is ovens and dispatch, used by every item. Cakes really carry about ¥217 of overhead each and loaves about ¥17.
Common misunderstanding
ABC in costing is unrelated to ‘always be closing’, the sales mantra with the same letters and its own page. A closer confusion is with activity-based management, which uses ABC figures to decide what to change, such as cutting wasteful steps or repricing a product. Activity-based costing itself only measures. It also does not change your total overheads; it changes how those overheads are divided between products and customers.
When to use it
Use it when you sell several products or serve customers whose demands differ sharply, for example small custom orders alongside large standard ones, and overheads are a big share of your costs. Leave it for now if you sell one main product or your overheads are small; a rough split in a spreadsheet will tell you whether a full model is worth the effort.