why is abc important BY 040891 Activity Based Costing Activity based costing was formed in the late 80’s onwards to represents an alternative or complimentary costing system providing more accurate product costs and management information. The concept of activity based represents a fundamental change in management thinking and management accounting for control in response to modern world competition and the trading environment.
ABC suggests that activities are the cause of cost which will lead to the production of oods and services which creates demand for activities which will finally lead to the “true” full cost of products and services which is a function of consumption of resources. Using ABC means that all the individual activities that are part of a process can be more accurately in terms of cost. For example in financial services organisations it will be possible to accurately determine the cost of each activity involved in processing a loan application from inputting information onto an application form to inal approval of the application.
In this way it will be easy to identify the most and least expensive parts of the process. Process improvement activity could then focus on the most expensive parts of the process. A model could then be constructed showing a comparison between the existing process costs and the redesigned process and its associated costs. Likewise, when assessing the costs of products and services, ABC can illustrate the costs of them and help in establishing the profitability of the individual products and ervices.
This can be particularly useful in modern economies where companies are increasingly trying to differentiate and personalise both products and services and tailor them to individual needs and requirements. ABC is now used widely in many businesses but not in all businesses. The advantages of ABC is that provides a much accurate product costs in the sense of demand such as the pull approach, provides a better complex in the manufacturing environment with changing cost structure.
Other advantages are that it is better for wider product range with shorter product life cycles and finally it is important to understand cost drivers in terms of factors for full product cost and profitability. Disadvantages of ABC are that it may be difficult to set up and establish, particularly if an organisation is using more traditional accounting methods for example barriers to change, can be time consuming if all activities are to cost and it may provide too much detail obscuring the bigger picture.