The Implementation of Activity Based Costing in Insurance Companies

Activity based costing is the most significant managerial accounting method in modern business conditions. Although this method was initially developed for manufacturing companies for the purpose of more accurate allocation of indirect manufacturing costs in order to determine the correct cost of a product, this method is widely and efficiently used in service companies. Activity based costing provides management with accurate and reliable information regarding costs for the purpose of decision making. The main assumption of activity based costing is that activities consume resources and cause costs and those activities are undertaken in order to produce products, provide services or satisfy consumers so costs must be allocated from activities to cost objects on the basis of appropriate cost drivers. Activity based costing is also applied in financial service sector especially in insurance companies. The main purpose of activity based costing application in insurance companies is to enable the appropriate information regarding costs in order to make a cost reduction and to improve profitability evaluation. In insurance companies, activity based costing is used to identify value added and non-value added activities and also to provide more accurate evaluation of product (insurance contracts) and customers' profitability evaluation. Insurance companies may implement various versions of activity based costing, but the most important and the most useful variant of activity based costing is time driven activity based costing. The purpose of this paper is to analyze the implications of activity based costing appliance in insurance companies and to present the potential model for activity based costing implementation in insurance companies. The research methods used in this paper is mainly oriented on the analysis of secondary sources with the application of induction and deduction methods and also the method of generalization.