Discussion 4
Do you think implementing Activity Based Costing, in an organization to make a better business decision is worth the added expense? Why or Why not?
Solution
Discussion 4: ABC System
Yes, implementing the ABC system in a company to make better business decisions is worth the added expense. The ABC system identifies the accurate overhead costs associated with producing a product or service, Managers are able to identify the project process that is going to perform well and efficiently. It increases the understanding of managers to identify the activities that are costly and non-value-adding, allowing managers to reduce these costs. Unlike the traditional method, it doesn’t only allocate the manufacturing cost based on the various factors. It is the most efficient method for companies to produce quality products with minimum production costs.
Activity-based costing or ABC system provides better information regarding production costs. It identifies the nature of the cost. With ABC, managers can control many overheads by managing many activities involved in manufacturing that affect the fixed overhead costs. This is possible because managers can identify the cost that is not value-added to production (onlinemasters.ohio.edu, 2022).
ABC system also traces the cost associated with customers, departments, and managerial responsibilities apart from product cost. It mainly helps the service Industries as service industries do not have many direct costs compared to the product industry Service industry does not have inventory or store costs as service can be taken at the time it is manufactured. For better returns, production costs need to be reduced in manufacturing. To reduce cost there is a need for change in activities. ABC system helps in identifying what is the area the company needs to focus on and can reduce its cost for better profitability (Zamrud & Abu, 2020, p.71).
As a result by applying activity-based costing, Companies can evaluate the production work and improve the quality of the product and services. This results in more accurate product pricing that allows the company to offer a competitive price while maximizing its return. ABC analysis is a different way of evaluating production costs in order to maximize a company’s profitability. If its implementation is done with the right understanding with the right purpose, it can give a good long-term return to the organization.
Reference List:
onlinemasters.ohio.edu (2022) Using Activity-Based Costing (ABC) to Increase Profitability
Retrieved from: https://onlinemasters.ohio.edu/blog/using-activity-based-costing-abc-to-increase-profitability/ [Retrieved on: 15th February 2022]
Zamrud, N. F., & Abu, M. Y. (2020). Comparative study: activity based costing and time driven activity based costing in electronic industry. Journal of Modern Manufacturing Systems and Technology, 4(1), 68-81.
