When viewed as serving market segments, utilities differ little from manufacturing companies, where most costs are shared among products and processes.
Activity-based cost management has had a tremendous impact on manufacturing enterprises; and its use has spread to some service industries such as banking, insurance and health care. ABCM encompasses two well-known management concepts: activity-based costing and activity-based management. Now that electric utilities are gearing up for competition, it is time to ask if ABCM has any relevance in the public utility industry.
Automation, technology and computerization have shifted costs, making the typical manufacturing process less labor intensive and more capital intensive. This shift has changed the cost profile of many industries. No longer do direct materials and labor costs make up the major portion of total product cost. Instead, overhead, which is shared by many products and services, is the dominant cost. As a result, traditional approaches to overhead allocation that rely on direct labor as the allocation base have become highly unreliable. ABC was developed to improve that situation. It can be used to improve accuracy of cost information, allowing a company to develop a more competitive marketing strategy and better manage spending.