The Benefits of Activity-Based Costing (ABC)
Activity –based costing is a manner in which businesses apportion costs by the amount of the resources a service or product uses. The application of ABC by a business is essential when there is a need to produce customized services or products (Bradtke, 2007). A production environment that is tailored requires the allocation of ABC’s actual indirect costs to a service or a product so as to determine its exact value. Therefore, the implementation of ABC can come with several benefits that this paper will discuss.
Some of the advantages that ABC brings to a business are improvements in the processes of the business and the identification of products that are wasteful. Concerning improvements in the processes of the business, the system of ABC apportions costs that are indirect by the cost driver of the product or the aspect that develops the value (Goektuerk, 2005). The emergence of a picture begins as the allocation of costs per product takes effect. During such a period, the processes of the business perform well, and the highlights of the processes that need improvement take the course. Additionally, a business can use ABC to identify the activities that do not add value to the business and also in the allocation of resources to the activities that are profitable and efficient. Alternatively, it is imperative to note that a business can use ABC to add value continuously to the business processes’ improvement.
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Concerning the identification of products that are wasteful as a benefit of ABC to a business, the technique will account for the costs that are same as the performance of the work of production. As such, the business will be in a better position to comprehend where its overhead costs go (Goektuerk, 2005). The ABC will make it possible for the business to identify the costs that are unnecessary as well as the products that are wasteful for the productive use of resources. ABC will also be useful in fixing the services or products prices that are either not correct or are in excess. Additionally, the overall quality of the service and product will improve as the date of the ABC details the issues of costs and production that require resolution.
Types of Business that would Apply ABC
Activity-based costing gives lots of focus on the allocation of overhead with the intention of providing accurate costs of products (Bradtke, 2007). Therefore, it is always applicable in the manufacturing industries where the completion of products depends on the overhead costs via the consumption of the working hours of the laborers.
References
Bradtke, D. (2007). Activity-Based-Costing . München: GRIN Verlag GmbH.
Goektuerk, H. (2005). Activity-Based Costing (ABC) - advantages and disadvantages: How ABC can be applied to institutions of higher education .
