It used to be that large corporations were the only
businesses involved in activity-based costing. Not so
today. Service industries such as banks, hospitals, insurance
companies, and real estate agencies have all
had success with ABC. But since its inception, activity-
based costing has seemed to have been more successful
when implemented by larger companies rather
than by smaller ones.
Friday, November 20, 2009
POTENTIAL PITFALLS OF ACTIVITY BASED COSTING
Companies that implement activity-based costing
run the risk of spending too much time, effort, and
even money on gathering and going over the data that
is collected. Too many details can prove frustrating
for managers involved in ABC. On the other hand, a
lack of detail can lead to insufficient data. Another
obvious factor that tends to contribute to the downfall
of activity-based costing is the simple failure to act on
the results that the data provide. This generally happens
in businesses that were reluctant to try ABC in
the first place.
run the risk of spending too much time, effort, and
even money on gathering and going over the data that
is collected. Too many details can prove frustrating
for managers involved in ABC. On the other hand, a
lack of detail can lead to insufficient data. Another
obvious factor that tends to contribute to the downfall
of activity-based costing is the simple failure to act on
the results that the data provide. This generally happens
in businesses that were reluctant to try ABC in
the first place.
HOW ACTIVITY-BASED COSTING WORKS
Activity-based costing programs require proper
planning and a commitment from upper management.
If possible, it is best to do a trial study or test run on a
department whose profit-making performance is not
living up to expectations. These types of situations
have a greater chance of succeeding and showing
those in charge that ABC is a viable way for the
company to save money. If no cost-saving measures
are determined in this pilot study, either the activity based
costing system has been improperly implemented,
or it may not be right for the company.
ACTIVITY-BASED COSTING
Activity-based costing (ABC) is an accounting
method that allows businesses to gather data about
their operating costs. Costs are assigned to specific
activities—such as planning, engineering, or manufacturing—
and then the activities are associated with
different products or services. In this way, the ABC
method enables a business to decide which products,
services, and resources are increasing their profitability,
and which are contributing to losses.
method that allows businesses to gather data about
their operating costs. Costs are assigned to specific
activities—such as planning, engineering, or manufacturing—
and then the activities are associated with
different products or services. In this way, the ABC
method enables a business to decide which products,
services, and resources are increasing their profitability,
and which are contributing to losses.
ACCOUNTS RECEIVABLE FINANCING
Accounts receivable financing provides cash
funding on the strength of a company’s outstanding
invoices. Instead of buying accounts, lenders use
invoices as collateral for the loan. Besides benefiting a
business in debt, accounts receivable financiers can
assume greater risks than traditional lenders, and will
also lend to new and vibrant businesses that demonstrate
real potential. An accounts receivable lender
will also handle other aspects of the account, including
collections and deposits, freeing the company to
focus on other areas of productivity.
funding on the strength of a company’s outstanding
invoices. Instead of buying accounts, lenders use
invoices as collateral for the loan. Besides benefiting a
business in debt, accounts receivable financiers can
assume greater risks than traditional lenders, and will
also lend to new and vibrant businesses that demonstrate
real potential. An accounts receivable lender
will also handle other aspects of the account, including
collections and deposits, freeing the company to
focus on other areas of productivity.
Accounts payable
Accounts receivable describes the amount of
cash, goods, or services owed to a business by a client
or customer. The manner in which the collection of
outstanding bills are handled, especially in a small
business, can be a pivotal factor in determining a
company’s profitability. Getting the sale is the first
step of the cash flow process, but all the sales in the
world are of little use if monetary compensation is not
forthcoming. Moreover, when a business has trouble
collecting what it is owed, it also often has trouble
paying off the bills (accounts payable) it owes to
others.
cash, goods, or services owed to a business by a client
or customer. The manner in which the collection of
outstanding bills are handled, especially in a small
business, can be a pivotal factor in determining a
company’s profitability. Getting the sale is the first
step of the cash flow process, but all the sales in the
world are of little use if monetary compensation is not
forthcoming. Moreover, when a business has trouble
collecting what it is owed, it also often has trouble
paying off the bills (accounts payable) it owes to
others.
PRIORITIZING AND MONITORING
This is especially true for fledgling business owners
who are often stretched pretty tightly financially.
Entrepreneurs who find themselves struggling to meet
their accounts payable obligations have a couple of
different options of varying levels of attractiveness.
One option is to ‘‘rest’’ bills for a short period in order
to satisfy short-term cash flow problems. This basically
amounts to waiting to pay off debts until the
business’s financial situation has improved. There are
obvious perils associated with such a stance: delays
can strain relations with vendors and other institutions
that are owed money, and over-reliance on future
good business fortunes can easily launch entrepreneurs
down the slippery slope into bankruptcy. Another
option that is perhaps more palatable is to make
partial payments to vendors and other creditors.
who are often stretched pretty tightly financially.
Entrepreneurs who find themselves struggling to meet
their accounts payable obligations have a couple of
different options of varying levels of attractiveness.
One option is to ‘‘rest’’ bills for a short period in order
to satisfy short-term cash flow problems. This basically
amounts to waiting to pay off debts until the
business’s financial situation has improved. There are
obvious perils associated with such a stance: delays
can strain relations with vendors and other institutions
that are owed money, and over-reliance on future
good business fortunes can easily launch entrepreneurs
down the slippery slope into bankruptcy. Another
option that is perhaps more palatable is to make
partial payments to vendors and other creditors.
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