How U.S. Manufacturers Can Use Activity-Based Costing (ABC) to Identify Hidden Problem Areas and Improve Profitability

In today’s fast-paced manufacturing environment, knowing your numbers is no longer enough. U.S. manufacturing decision-makers need to understand the why behind the numbers—especially when it comes to costs. Many manufacturers rely on traditional costing methods that allocate overhead based solely on machine hours or labor hours. But this approach often obscures the true cost of production, leading to mispriced products, poor capacity planning, and missed opportunities for efficiency gains.

Enter Activity-Based Costing (ABC)—a more accurate and insightful approach that aligns costs with the actual activities that drive them. When used correctly, ABC can reveal the true cost of manufacturing operations, highlight underperforming products or services, and help leadership pinpoint areas for improvement.

In this article, we’ll explore the fundamentals of ABC, how it compares to traditional costing, real-world examples of its effectiveness, and how manufacturers can integrate it into broader strategic planning using the V+ EDGE Balanced Scorecard—a powerful performance management system designed specifically for early problem detection and proactive decision-making.

What Is Activity-Based Costing (ABC)?

Activity-Based Costing (ABC) assigns overhead and indirect costs to specific activities, rather than spreading them evenly across all products or departments. These activities—like quality inspections, equipment setup, or material handling—are then traced to the products that use them.

In contrast, traditional costing methods often apply a flat overhead rate based on labor or machine hours, regardless of how resources are actually consumed. This can severely distort cost estimates, especially in multi-product or complex manufacturing environments.

Key Advantages of ABC for Manufacturers:

• Reveals high-cost, low-value activities

• Identifies unprofitable products or customers

• Enhances decision-making in pricing, outsourcing, and process improvement

• Supports lean initiatives by highlighting non-value-added tasks

The Pitfalls of Traditional Costing in Manufacturing

Traditional costing assumes that overhead is incurred uniformly across products, but this is rarely the case in real-world operations. For example, a low-volume custom order might consume disproportionate setup time, quality control effort, or administrative overhead—yet traditional costing would understate its true cost.

Example:

A mid-sized plastic injection molding company in Illinois applied traditional costing and believed that all product lines had similar margins. After implementing ABC, they discovered that one of their "most profitable" products actually had a negative margin of -3.5% once setup, rework, and special packaging were properly allocated. This insight allowed them to reprice the product or seek more efficient production strategies.

Real-World Data: The Power of ABC in U.S. Manufacturing

According to a 2023 Deloitte manufacturing cost analysis survey, companies using ABC reported a 15–25% improvement in product-level cost accuracy compared to those using traditional methods. Additionally:

• 68% of ABC adopters identified at least one unprofitable product or customer segment.

• 52% used ABC data to optimize their product mix and eliminate low-margin offerings.

• Companies that integrated ABC with strategic KPIs reported a 21% increase in gross margin over three years.

Identifying Hidden Problem Areas with ABC

When deployed correctly, ABC becomes a powerful tool for diagnosing root causes of poor financial and operational performance. Here are some common problem areas that ABC helps uncover:

1. Excessive Setup Costs

Setup activities often go unnoticed in traditional costing but can eat into margins significantly for short-run jobs. ABC highlights setup-heavy jobs that might need reengineering or scheduling adjustments.

2. High Cost of Quality

By tracking inspection time, rework, and scrap as separate activities, ABC can pinpoint where quality lapses are costing the business—not just in materials, but in labor and opportunity cost.

3. Customer-Specific Cost Drivers

Some customers require special handling, expedited shipping, or dedicated account support. ABC allows manufacturers to segment customers based on true profitability, not just top-line revenue.

4. Underutilized Equipment

If certain machines or production lines require high maintenance or long changeover times, ABC allocates those overheads appropriately—highlighting which assets are dragging down ROI.

Integrating ABC with the V+ EDGE Balanced Scorecard

Financial visibility alone is not enough. Manufacturers need to align cost data with strategic priorities. That’s where the V+ EDGE Balanced Scorecard and its supporting modules come in.

The V+ EDGE system enables manufacturing leaders to:

• Map ABC data to strategic KPIs such as product margin, setup time, or customer cost-to-serve.

• Use dashboards to identify cost-intensive activities that don't align with business value.

• Prioritize continuous improvement efforts based on accurate, activity-level costing data.

For example, the Operations Module on the V+ EDGE platform provides real-time visibility into machine-level performance and resource utilization, integrating ABC insights directly into tactical decision-making. Similarly, the Financial Module ensures that ABC outputs feed into broader financial planning, including capital allocation and pricing models.

How to Get Started with ABC and Strategic Cost Management

Implementing ABC doesn’t have to be disruptive. Begin with a pilot program in a single product line or facility. Identify the key activities, assign relevant costs, and evaluate the results. Then scale across the business.

Better yet, integrate ABC into a performance framework like the V+ EDGE Balanced Scorecard to monitor not just costs, but how those costs impact strategic goals and long-term value creation.

Your Next Step: Turn Cost Data into Competitive Advantage

The most successful U.S. manufacturers are no longer relying on outdated costing models that hide inefficiencies. With Activity-Based Costing, you can see the full picture—and with tools like the V+ EDGE Balanced Scorecard, you can act on it with precision.

Schedule your FREE Discovery Session today to explore how Strategic Value Partners can help you implement ABC and integrate it with the V+ EDGE system for real-time visibility, smarter decision-making, and bottom-line growth.

Visit https://strategicvalueplus.com/v-edge-balanced-scorecard to learn more and schedule your session.

Resources for Further Learning

• Activity-Based Costing Guide: Activity-Based Costing (ABC): Method and Advantages Defined with Example

• Deloitte Manufacturing Cost Reports: https://www2.deloitte.com/us/en/pages/operations/articles/costing-and-profitability-management.html

• U.S. Manufacturing Data: 2025 Manufacturing Industry Outlook | Deloitte Insights

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