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Capacity costs are probably the most difficult to deal with conceptually but also the most important,
especially with advances in technology driving these costs upward. Most managers simply take the
period capacity cost and divide by the units of output. 3 As shown in Exhibits 13.5 and 13.6, this can be
extremely misleading. To better manage an infrastructure cost, one must take into consideration the
capacity of that infrastructure. 4
As is evident from the previous discussion, ABC systems require a different format for aggregating
costs. Financial accounting reports costs by function, which is close to worthless for internal decision
making. The Company Z analysis focused on identifying the activities that consumed resources,
thereby creating costs. The next step would be to aggregate these costs by activity, as shown in
Exhibit 13.8. For example, the activity “customer identification” aggregates costs from the following
line items in the financial ledger: sales expense, marketing expense, technical support, travel, and
administration expense. See Exhibit 13.8.
Exhibit 13.8 Activity-based costing process.