Benefits of Activity Based Costing Essay

In order to exploit a profit on production, the firm would have to charge a price that is greater than the damage of production. Gener everyy, the monetary value of production is understood to be the cost of producing a good plus the cost of transportation to the consumer. In order to stay in business, and therefore, to avoid losses at all possible cost the firm must cover all cost related to the production of the good and include all costs to support the homogeneous to the consumer at a price that is higher than the cost of production.The in operation(p)(a) or overheard expenses of an enterprise ar generated by its activities to perform its business and/or manufacturing executees victorfully. As its name implies, activity found be relates the costs lining the enterprise to its various activities. By so doing, this establishment of cost provides fair accurate information about costs, al mooing businesses to effectively manage their overhead expenses in order to increase their revenues (Cooper, 1988). It is but commonsensical that companies may work on cutting their costs once they know what is driving these costs.By up(a) their processes in order to cut costs, businesses may realize greater internet than before. What is more, by identifying high be activities needed to micturate certain goods or serve certain customers, companies may decide to focus instead on low costing products or customers by reducing their production of or service to high costing products or customers. In this way, they may rift their focus to products or customers that atomic number 18 more profitable to produce or to serve. Thus, management experts cite the following do goods of activity based costing as opposed to traditional methods of costingIdentifying the most and to the lowest degree profitable customers, products and channels. throttle the true contributors to and detractors fromfinancial performance. Accurately predict costs, profits and resource requireme nts associated with changes in production volumes, presidential termal structure and resource costs. Easily identify the musical theme ca employs of poor financial performance. Track costs of activities and work processes. Equip managers with cost intelligence to drive changements. Facilitate better Marketing Mix.Enhance the negociate power with the customer. Achieve better Positioning of products. (Activity establish Costing, 2008). Businesses that benefit the most from activity based costing atomic number 18 those with high manufacturing operating expenses or overhead costs. These costs may result from a assorted range or products, intensity of capital, or vertically integrated governance of manufacturing. Activity based costing may foster such(prenominal) businesses non hardly to understand but besides to control their operating expenses so as to increase their revenues (OGuin, 1991, p. 76).Organizations with large merchandise, sales or dispersion costs may also reap great benefits from activity based costing. As mentioned previously, this method of costing identifies those customers that ar most profitable from those that are least profitable. This provides insight to management on how to improve operations. With activity based costing, such businesses may be able to answer questions such as What discounts are appropriate for large orders? What size accounts should salespersons no longer call on? How effective is advertising to different markets? (OGuin, p. 76). Firms that are experiencing sluggish or low profitability on increasing sales may be woe from growth that is unmanaged. It may very well be that these businesses are change products at losses to a number of customers. The accounting system of accurately measuring costs, that is, activity based costing, would allow these firms to determine which of their customers and products are generating revenues and which are not (OGuin, p. 76). OGuin describes another benefit of the activity ba sed costing system thusEven with a diverse product bank note or customer base and very high profitability, a partnership lacking an ABC system is surprisingly vulnerable. Product profitability belike varies widely across the company. Highly profitable products present an irresistible goat to new market entrants. Management should know which products are reaping enormous margins, so they can erect barriers to entry. (p. 76). Also according to OGuin, the activity based costing system provides not only strategic but also tactical benefits to businesses that implement it.Whereas benefits that are strategic in nature may be effected only once in a sour moon, for the simple reason that organizations cannot be expected to change their pricing, business operations, distribution or manufacturing processes each year tactical benefits may be realized constantly. Indeed, activity based costing could help businesses not only with step-down of overhead costs, but also just-in-time support , improvement of quality, decisions about design, and investment in capital. Thus, businesses that implement the activity based costing system may improve their profitability on an ongoing basis (OGuin, p.76). In the twenty archetypal century, companies that have a competitive edge are those that maintain flexibility, a trend that has been recognized as a critical factor for success since the 1990s. Life cycles of products have been shortened and focus on the customer has hold out increasingly important. As economies of scale virtually disappear, manufacturing plants that are successful are those that are able to quickly introduce innovative products and economically produce small quantities. Activity based costing system can help businesses tremendously to achieve these goals.What is more, this system of costing could assist businesses of the twenty first base century to achieve their goal to increase employee motivation. With the activity based costing system in place, employee s increase their understanding of business activities and therefore their appointment in business operations. So, for example, whenever they empathize a mound of papers they would see overhead costs, leading them to the following questions Why do we have so many bills? Why are there so many process involved in our purchase orders (OGuin, p.76)? Thus, the activity based costing system encourages businesses to push their rates of cost drivers down. This helps in the reduction of time to setup, streamlines buying, in addition to time taken to development a product. When costs are attached to each of these processes or activities, management may not only measure but also plan improvement (OGuin, p. 76). As mentioned before, around of these improvements may entail reducing production of goods or service to customers that cost more to produce or service than the others.Hence, the activity based costing system may also lead the business that implements it to improve upon its marketing m ix or positioning of its products. If products and customers that cost more than the others are indispensable by the company to produce or serve in the same beat as before, however, activity based costing system helps the organization to improve its processes in order to decrease its costs without reducing the quantity to produce or serve. After all, it is only possible to improve wasteful processes.Because activity based costing allows the company to weigh the costs of activities against their benefits, firms that use it are in a great position to increase the capability of all of their processes so as to gain competitive advantages. References Activity Based Costing. (2008). Value Based Management. Retrieved Jan 27, 2009, from http//www. valuebasedmanagement. net/methods_abc. html. Cooper, R. (1988, Summer). The Rise of Activity-Based Costing Part nonpareil What is an Activity-Based Cost System? Journal of Cost Management, pp. 45-54. OGuin, M. C. (1991). The Complete channe l to Activity-based Costing. Chicago, IL CCH Tax and Accounting.