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.
Showing posts with label BASED. Show all posts
Showing posts with label BASED. Show all posts
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.
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