March 2005 (Revised March 2006)
Background Note
HBS Case Collection

Activity-Based Costing and Capacity

Format:Print
| Pages:10

Abstract

Discusses the use of budgeted rather than historical data in an activity-based costing (ABC) model and argues for calculating rates using practical capacity, not actual utilization. An ABC model need not be limited to analysis of historical data. When cost driver rates are calculated based on forecasted data, they can be used proactively for decisions such as pricing and order acceptance. Second, to avoid distortion of cost driver rates caused by unused capacity, the rates should be calculated using the practical capacity of the resources performing the activity. Discusses how to estimate practical capacity in various situations, including lumpy capacity acquisition, ramp-up of capacity utilization, seasonal and peak-load capacity, and differing service quality levels from supplied capacity.