ABC costing in most situations can provide a much more clear and accurate measure of cost, given a precise cost object. The majority of places that seem to use activity based costing are businesses and manufactures. However, at first glance I do not understand why sports franchises can't use activity based costing as well. It seems as though there are clear cost drivers that can be assigned to each cost object. Currently pretty much all sports franchises elect to use volume based costing rather then ABC.
I am going to attempt to delve a little bit deeper into why exactly this is, and determine whether it would make sense to consider activity based costing.
The benefits that could be achieved if activity bade costing were to be used are extremely impressive. I will review a few of them. The first is better profitability measures which is primarily due to the more accurate product costs which in turn leads to more accurate profitability measurements. Secondly, ABC can enhance decision making due to more accurate activity-driving costs, which can help managers improve more on product value and the process in which they provide the product. Next is cost estimation which uses the improved product costs to lead to better estimates for pricing decisions, budgeting, and planning.
Although there are great benefits to activity based costing just like most other things in life it also has its limitations. The first one is that not all costs have clear and easy to trace cost drivers. Many costs can require complicated allocations to arrive at a usable cost driver. Second is the omission of some costs such as marketing, advertising, research and development that are part of the product or service costs. The last and in my opinion the most crucial when it comes to sports franchises is the expense and time that can be needed in performing an accurate activity based costing analysis. An activity based costing system can be both expensive and time consuming to develop and implement, and like most innovative accounting systems ABC can take a long time to successfully implement into an organization.
The issues that a sports franchise would most likely have with trying to develop and implement an activity based costing system is accurately determining cost objects and cost drivers. Some of the typical cost that would go into a sports franchise would be janitorial supplies, food costs, labor, maintenance, salaries, equipment, etc... To accurately determine cost drivers to all of these things seems to be too difficult and not worth the time or money.
However, I do think that implementing an activity based costing system to a more concentrated area like concessions may have its advantages. The reason for doing this is that assigning a cost driver to the food products should not be difficult, and this would make tracking and assigning costs in the concessions segment of the franchise much more accurate.
Activity based costing can be a magnificent way of accurately assigning costs to all sorts of objects, and there is no denying that activity based costing can be beneficial when cost drivers are easily identified. However, in the case of a sports franchise I believe that the costs and limitations may out way the benefits. The time and money that would be needed to successfully implement a well developed system would just not be practical.
