Recently I wrote about MLB (Material, Labor, Burden) as a business model for allocating the overhead costs of an organization. Usually, these costs are lumped together and spread proportionally across the company’s entire set of products or services.
- All cell phone users are charged the same monthly fee for unlimited text and data usage
- All college students are charged the same library fee regardless of how often they use it.
- The cost of all storage units are lumped into the facility dept budget
There is another model called “Activity Based Costing (ABC)” that is sometimes used to allocate these expenses…especially for manufacturing environments. Rather than spreading costs evenly, ABC allocates expenses based on usage.
- We could allocate cell phone text and data expenses based on total usage by each phone or account
- We could allocated library costs to those students who visit most often
- We could allocate costs of storage units to the departments with the most “stuff”
ABC is a great concept to learn, even if you don’t use it in your normal course of doing business. It helps build awareness of costs and their sources.
What are the underlying costs of your projects…and how are they allocated?
Thanks for listening.