How activity-based costing could overcome the deficiencies inherent in the existing costing system?

Answer 1

Greetings.

Your questions does not tell about the existing costing system but I assume that you are using the 'traditional' way of costing as standard costing.

The major deficiency is that when we talk about costing, we are always assuming that is 'Product Costing'. By doing this we take all the costs to the product. This is not necessarily true. There are various reasons that cause costs in your organization. These could be Products, Customers, Channels, Capacity built, to sustain business (typically called as 'cost object' in ABC) etc.

Another major difference is that ABC first calculates the cost of various activities and then it takes to the cost objects. This helps in understanding the root causes for the costs and can help in improving the costs.

It gives insight into the performance of the processes in the organization as to how much of the process is really 'value adding' to the organization. The 'non value adding' part of the processes can be eliminated or reduced.

Typically the functional managers are informed about the actual expenses v/s budgeted expenses. With this information the managers can be either happy or sad. They cannot be smarter. ABC can tell the functional managers how they have utilised their resources.

I hope I have provided some information to you. You can visit my blog on the subject at www.activitybasedmgmt.blogpsot.com or write to me at rajendra@appsconsulting.in.

Rajendra Patil