ABC Costing

Accounting, it is not just about account receivables and payables.  It also helps assess how your aircraft are performing so you can answer questions such as which aircraft are doing well, and which are performing poorly.   

There are several models out there that companies use to identify their costs.  However, if you are a charter operator, one model to consider is Activity Based Costing (ABC).  ABC is a great tool to help you understand and evaluate aircraft performance.  The model was developed in the 80s and has been instrumental in identifying costs associated with an aircraft operation.  

So how does it work?  It works by allocating costs based on individual drivers. As an example, light aircraft that are popular should carry the brunt of your administrative cost.  Why, because they are using more of those resources than an aircraft that is not being flown as much.  Therefore, overhead could be driven by trips and not just hours. How many charter operators have a minimum flight duration?  Why?  Were you thinking about overhead when you developed that minimum flight duration when generating a quote?

Overhead is only one component of the overall picture.  Other components include maintenance cost, operational cost, and crew cost and each could have their own driver.

Activity based costing is a basic analytical tool that every charter operator should have in their tool kit.  It’s just one of many tools charter operators should use when managing their operations from an efficiency standpoint.  If you would like to understand more about ABC and its role in the charter arena, please feel free to reach out to us, or speak with your accountant.

Christian Huff – Co-Founder and Chief Executive Officer