Allocation of energy costs in manufacturing using activity-based costing

Traditional accounting and product costing methods usually take energy costs, put them into the category of overhead, and then allocate these costs based on the product's labor usage rate. Often, this does not correctly assign the true energy cost to a given product or cost center. A more modem approach is activity-based costing which identifies specific cost drivers and then allocates costs based on the details of the facility's equipment, operation and product mix. This article will apply the activity-based costing methodology to allocating energy costs in a manufacturing environment. Energy costs at Double Envelope Corporation, located in Gainesville, FL, are used as an example of this new method. To the authors' knowledge, this is the first article to specifically apply the principles of activity-based costing to detailed energy costing and energy management in an actual manufacturing company.