CAM-I Model of ABC & Need of ABC

CAM-I Model of ABC & Need of ABC

Part 1: The CAM-I Model

The foundation stone for ABC was laid in the US manufacturing sector during 1970s and 80s. And this was further formalized by the Consortium for Advanced Management-International (CAM-I).

So, to better understand ABC we must understand the CAM-I Cross.

CAM-I Cross

The vertical view is called the ‘Cost Assignment View’ as it tells how the cost is assigned. It answers the following questions:-

Element	Question Answered by it
Resources	What we spend?
Resource Driver	Why we spend it?
Activities	What we do?
Activity Drivers	Why we and how much we do it?
Cost Object	Who/for what we do the activities?

The Process View answers why things have cost i.e. why cost exists and what causes it to fluctuate.

Part 2: Need of ABC

Being initially introduced by CAM-I for the manufacturing industry, ABC is often mistaken to be useful only for manufacturing industries. But, this is certainly not the case. Why so?

To understand this let us first know why the need of ABC arose, what was so wrong with the good old traditional costing that it needed a replacement.

Over the years, as the businesses evolved, the component of Overhead Costs in the Total Cost of the business has increased.

The overhead costs result from O/H activities which aren’t linked to production or sales volume. These are linked/dependent upon the diversity and complexity of products (or services/ channels/ customers).

Traditional costing allocated costs primarily on the basis of volume. As the overheads costs were not based on volume, allocating them on volume basis resulted in incomplete, in appropriate or unprocessed allocation.

The allocation needed a more logical approach, a better cause and effect relationship between the Resources (Cost) and the Cost Objects.

ABC filled this gap. It first converted the Cost into Activity Cost, the activities could be better linked to Cost Objects. Thus Activity Cost was allocated to various Cost Objects using the particular activity. Also, each activity has a different driver which defined the quantum of cost to be allocated.

To summarize ABC added a layer ‘Activity’ to the traditional costing method thus providing a more logical allocation method.

P.S. Manufacturing as a sector was the first to mature with regard to complexity and diversity in products offered, the service sector followed it. This sounds like the reason why manufacturing was the first to use ABC and hence the myth that ABC is for manufacturing sector.