Activity Based Costing – ABC and ABM
This model is for small to medium sized companies that manufactures textiles and clothing in UK. Corporate margin of error is significantly decreased due to globalization of market and increase in competition… In order to have a clear picture of operational reality planning of a good company depends on a costing system that is strategic. With the help of this model companies have started realizing that they are incurring loss due to sale of some of the products.
With the help of activity based costing some of the indirect costs have been transformed into direct ones. A clear picture of production costs is provided by this approach. This is so because now instead of arbitrary allocation of overhead costs, cause and effect forms the basis for its allocation. New management methodology distinguishes this model from conventional model. An organization starts adopting the principles of activity based management once this model starts identifying cost by activity. ABM does not focus on resources instead it provides new vision on the operations of company by forming the basis of management decision. Instead of randomly assigning resources relevance of the activities are questioned by the managers and hence the resources allocated are optimized.
Main advantage of ABM is that it focuses on cost management activity i.e. it identifies performance measures of the company that are specific. Due to the identification of these performance measures planning techniques are improved.
Benefits provided by activity based costing are:
• Better marketing fix is facilitated
• Bargaining power (with the customer) is enhanced
• Better positioning of products is achieved
• Most profitable customers and channels are identified.
• Least profitable customers and channels are identified.
• Main cause of poor financial performance is easily identified.
• Cost, profits and resource requirements are accurately predicted
In order to improve company’s performance and to implement strategic decision making this approach is very effective. Progress of non-quality costs can be routinely tracked by the same managers. ABC has helped the organizations to meet the better quality products need in the market and that too at competitive price. Competitive cost advantage cab be built with the help of ABC. With this efficiency has been improved and cost have been reduced. ABC forms the basis for balance scorecards in many companies.
Written by: Matt
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Tagged as activity based management, assigning resources, bargaining power, better marketing, conventional model, cost management, costing system, financial performance, indirect costs, management activity, management decision, management methodology, margin of error, medium sized companies, model companies, operational reality, overhead costs, performance measures, planning techniques, profitable customers + Categorized as Business, Economy articles, Finance