By Stephen L. Nelson

Activity-based costing (ABC) is the best new idea in accounting in the past three decades and QuickBooks is a supporter. ABC gives businesses a better way to estimate the profits of products and services, which is more important than you may think. The problem in many businesses is that overhead expenses or operating expenses don’t cleanly tie to products or services. Without good allocation of overhead or operating expenses, businesses can’t accurately determine which products make money and which don’t.

ABC addresses this problem by using the power of the computer (QuickBooks, in this example) to directly trace overhead costs to products and services. Surprisingly, ABC accomplishes this task in a pretty straightforward, simple fashion.

Okay, you’re probably saying to yourself, “All this sounds pretty good. But how does it really work with QuickBooks?”

Oh, that’s right. You need to know how an ABC system works in QuickBooks, don’t you? No problem — the approach is actually really straightforward if you’ve already been using QuickBooks. In short, all you do to implement a simple ABC system in QuickBooks is what you’re doing right now. In other words, just keep on tracking your operating expenses by using a good, decent chart of accounts. That’s 90 percent of the battle.

You also need to take care of just one or two minor, additional items. First, you turn on the QuickBooks Class Tracking feature. Class Tracking lets you categorize income and expense transactions as falling not just into income and expense accounts, but also into particular classes.

Second, when you record an expense, you also identify the class into which the expense falls. Using classes that correspond to your activities — well, you can see that’s all it takes, right?