Cost-reduction: Activity-based costing (ABC) and LSS

Whether you are trying to reduce your operating expenses, improve efficiency or determine how much to charge your customers, gaining an understanding of your cost structure is an important first step. VCG is experienced at undertaking cost structure analysis and a key approach we use is Activity Based Costing (ABC).

ABC is an approach for measuring the real cost and performance of a business from the perspective of the resources consumed by the various activities executed to produce its products or services. It differs from more conventional costing methodologies that seek to apportion costs based on revenue contribution or production volumes.


VCG offers advisors who have experience and expertise assisting organisations undertake ABC reviews, implementing ABM and maintaining related performance management systems.

VCG uses a proven methodology that delivers effective and reliable costing models that are not overly complicated, are efficient to maintain and can be integrated with existing corporate and management reporting systems. The transfer of skills to facilitate ownership and on-going maintenance of these models is a key feature of our approach.

VCG can also assist by redefining and redeveloping existing models, converting a purpose built model to an organisation-wide model, integrating any existing models with corporate systems or enhancing data capture and other associated processes and systems.


Many public sector agencies and government related businesses operate on a cost recovery basis.

The current economic environment demands that agencies improve the consistency, transparency and accountability in funding cost recovery arrangements to promote the efficient allocation of resources and to appease customers. Accordingly public sector agencies or public related businesses need to:

  • Understand the real and full costs of output delivery
  • Seek funding that are commensurate with costs
  • Continuously improve business processes, systems and existing work practices to reduce costs and improve service delivery performance.

To achieve this organisations need to implement robust frameworks to manage cost structures and to justify the price of their outputs. This means that all costs and overheads need to be allocated in a meaningful way to outputs, and the pitfalls of pro-rata cost allocation need to be avoided.

TABC is recognised (including by DoFD) as the appropriate way to effectively allocate costs to activities and outputs. ABC costs activities and outputs on the basis of resources consumed as opposed to traditional cost allocation techniques that can result in cross subsidisation or non-identification of non-value adding activities.

The real benefits of ABC include:

  • Identification of the full and true cost of activities and outputs based on resources consumed;
  • Establishment of a cost structure that is justified and that provides the transparency necessary to effectively manage business processes;
  • Identification of non-value adding processes, wastage and unused capacity; and
  • Establishment of a robust platform for negotiation of fees and charges.
how can we help you?

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