Activity Based Costing
When a business runs smoothly it impressed the manager in-charge. For them to achieve the smooth running of their businesses, they have to put several factors that involve management from the production of the goods and services that their companies offer. This, therefore, leads to an introduction of one of such aspects: Activity Based Costing (ABC) analysis. This is a concept that is applicable in the business field in order to improve its competence and productivity. In these, ABC helps in the creation of budgets as well as setting prices of commodities. In addition, upon establishment of ABC, there is the identification of customers’ cost and their relations.
As Swamidass (2000) has observed, knowledge about Activity Based Costing provides a lot of insights into problems that may come up within an organization. According to Swamidass (2000), ABC has several benefits that in turn help in improving the operations of a business. One of them includes the endless critical organizational of how solutions can be created achieved when the managers themselves understand ABC. It also improves business management because of its potentiality in checking on all aspects of the business, analyzing them and then ultimately suggests on the way forward of doing it better. This approach triggers immediate improvement in an organization (Swamidass, 2000).
ABC considers all the activities as absorbed in the production of goods and services, in any organization. This means that there is the inclusion of the cost drivers for the mentioned activities and their base rate in the ABC concept, a fact that explains the potentiality of it in management. Activity Based Costing is a concept that calculates and measures the cost of goods and services that a company offers. It does this because of the accurate information that emanates from its analyses about the company’s undertakings. This information facilitates accurate results; this subsequently renders ABC as an efficient instrument to be used to allocate resources of an organization as well as being the preferred way to manage processes in the same organization.
There are reasons for the success that a company realizes when it applies the entire concept of ABC. This is so because it has a direct or indirect interaction between pillars of organizational processes. In fact, any organization that has something to do with the cost that it pays for goods gains through it all. Several aspects of cost found in these organizations and companies focus to achieve success by the use of Activity Based Costing. For example, there is cost on resources, cost on drivers, objects and activities in general. Another compelling reason why ABC improves business management is the fact that it is capable to identify activities and resources of the company. The amount needed to produce goods and services in the organization is hence determined using the ABC approach. Swamidass (2000) has echoed this aspect of ABC business management improvement. He says that it has a potential in developing strategic management by means of decreasing the cost of any misrepresentations in the organization.
ABC analysis in a company, also, accounts for the volume of products manufactured. In addition, it also considers the products’ complexity as well as requirements owing to support of services (Swamidass, 2000). This shows how Activity Based Costing creates realistic data based on the cost incurred by a company. As a matter of fact, ABC systems have always ensured fair cost allocation to all aspects of production in the company. Looking at the cost allocation issue, ABC is legible in allocating cost distinguishable stages that, Swamidass (2000), reveals refer to as multiple allocation bases. There is no relation between these stages and the unit volume expected in production activities that a company undertakes.
Activity Based Costing as a whole offers an immense assistance in identifying prospects for goods and services mix that a company offers. The mix in itself considers changes that come along with it. For instance, ABC is effective in creating awareness in product, process and price mix changes. Moreover, it also considers restructuring the organization by offering suggestions of better ways of running the business with minimal cost for maximum profit.
Financial and operations managers of organization admit that ABC concept is of much importance in their field of work. According to them, ABC determines output avenues for the production process, in addition to customers available for, the output. ABC accounts for the quality of the output, quality measures are a reality as well as activities needed to realize a satisfactory output. Owing to the observation from the discussion above, ABC has all it takes to allocate these activities that ultimately consume resources and also establish how the activities add value in the management of an organization. The sole information that ABC uses to realize quality management in organizations is all about the cost of pools, drivers and production processes. ABC has helped in identifying business strategies; this has improved the way of designing products, over and above the fact that it has helped in the elimination of waste from operations.
Swamidass, M. P., (2000). Encyclopedia of Production and Manufacturing Management. New York: Springer
