Trace activity costs, not average costs
Use activity-based costing logic to challenge average overhead allocations that distort profitability.
The diagnostic: when profitability looks wrong, check whether overhead is being averaged across unlike work. Activity-based costing starts with activities, not departments. It asks what work consumes resources, what triggers that work, and which cost objects caused the trigger. This is especially useful when a business serves different order sizes, custom needs, support intensity, delivery patterns, or product complexity. Find the activity Do not begin with 'operations overhead.' Break it into order entry, picking, setup, inspection, support, billing, returns, or account management. Pick the driver A driver is the observable thing that causes cost to rise: tickets, setups, shipments, change…
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