Benefits of Activity Based Costing Essay

In order to make a profit on production, the firm would have to fault a toll that is greater than the cost of production. Gener everyy, the cost 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 losings at all possible cost the firm must cover all costs relate to the production of the good and include all costs to deliver the same to the consumer at a price that is higher than the cost of production.The operating(a) or overheard expenses of an enterprise ar generated by its activities to perform its business and/or manufacturing processes successfully. As its name implies, activity based cost relates the costs facing the enterprise to its various activities. By so doing, this formation of cost provides pretty accurate information about costs, al gloomying businesses to effectively manage their bash expenses in order to increase their revenues (Cooper, 1988). It i s but commonsensical that companies whitethorn carry on cutting their costs once they know what is driving these costs.By improving their processes in order to cut costs, businesses may pretend greater profits than before. What is more, by identifying high be activities needed to baffle certain goods or reassure certain clients, companies may decide to focus instead on low cost products or customers by reducing their production of or dish up to high costing products or customers. In this way, they may electric switch their focus to products or customers that are more moneymaking to produce or to serve. Thus, management experts cite the future(a) benefits of activity based costing as opposed to traditional methods of costingIdentifying the most and least economic customers, products and channels. Determine the true contributors to and detractors fromfinancial performance. Accurately predict costs, profits and resource requirements associated with changes in production v olumes, organizational structure and resource costs. Easily identify the root causes of poor financial performance. Track costs of activities and work processes. Equip managers with cost intelligence to drive improvements. Facilitate better Marketing Mix.Enhance the bargaining berth with the customer. Achieve better Positioning of products. (Activity Based Costing, 2008). Businesses that benefit the most from activity based costing are those with high manufacturing operating expenses or crash costs. These costs may result from a assorted range or products, intensity of capital, or vertically integrated organization of manufacturing. Activity based costing may help such businesses not only to understand but too to control their operating expenses so as to increase their revenues (OGuin, 1991, p. 76).Organizations with large marketing, sales or distribution costs may also reap great benefits from activity based costing. As mentioned previously, this method of costing identifies those customers that are most remunerative from those that are least profit satisfactory. 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 suffering from growth that is unmanaged. It may precise well be that these businesses are selling products at losses to a number of customers. The accounting remains 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 based costing system thusEven with a versatile product line or customer base and v ery high profitability, a company absent an ABC system is surprisingly vulnerable. Product profitability probably varies widely across the company. Highly profitable products present an irresistible target 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 temper may be realized only once in a blue moon, for the simple primer 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 reduction of overhead costs, but also just-in- m support, improvement of quality, decisions about design, and investment in capital. Thus, busines ses that implement the activity based costing system may improve their profitability on an ongoing basis (OGuin, p.76). In the twenty outgrowth degree centigrade, 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 become 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 century to achieve their goal to increase employee motivation. With the activity based costing system in place, employees increase their soul of business activities and therefore their involvement in business operations. So, for example, whenever they see 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, some 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 mix or positioning of its products. If products and customers that cost more than the others are required by the company to produce or serve in the same quantity 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 inefficient processes.Because activity based costing allows the company to count the costs of activities against their benefits, firms that use it are in a great position to increase the efficiency 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 test of Activity-Based Costing Part One What is an Activity-Based Cost System? Journal of Cost Management, pp. 45-54. OGuin, M. C. (1991). The Complete campaign to Activity-based Costing. Chicago, IL CCH Tax and Accounting.