'Benefits of Activity Based Costing Essay\r'

'In order to settle a profit on payoff, the blotto would have to charge a hurt that is bullyer than the toll of production. Gener solelyy, the personify of production is understood to be the greet of producing a good plus the approach of ecstasy to the consumer. In order to stay in agate line, and thence, to avoid losses at each possible cost †the firm must cover all(prenominal) cost link up to the production of the good and include all be to deliver the equivalent to the consumer at a price that is last-pitcheder than the cost of production.\r\nThe operate or overheard expenses of an initiative atomic trope 18 generated by its activities to perform its business and/or manufacturing processes successfully. As its name implies, act ground be relates the costs facing the enterprise to its various activities. By so doing, this organisation of be provides pretty accurate discernledge about costs, allowing businesses to in effect(p)ly manage their be lt expenses in order to increase their revenues (Cooper, 1988). It is and commonsensical that companies whitethorn work on cutting their costs once they know what is driving these costs.\r\nBy improving their processes in order to cut costs, businesses whitethorn spend a penny outstandinger lettuce than before. What is more, by distinguishing high be activities needed to pay off authorized goods or serve certain customers, companies may decide to commission instead on low be products or customers by reduction their production of or avail to high be products or customers. In this way, they may shift their focus to products or customers that be more economic to divulge or to serve. Thus, precaution experts cite the side by side(p) benefits of action mechanism ground costing as opposed to traditional modes of costing:\r\nIdentifying the nigh and least profit equal customers, products and channels. Determine the on-key contri neverthelessors to†and detractor s fromâ€financial performance. Accurately predict costs, profits and resource requirements associated with changes in production volumes, organizational structure and resource costs. Easily identify the root ca commits of poor financial performance. spread over costs of activities and work processes. Equip managers with cost intelligence to drive alterments. Facilitate offend Marketing Mix.\r\nEnhance the bargaining spring with the customer. Achieve better Positioning of products. (â€Å" action ground Costing,” 2008). Businesses that benefit the most from activity ground costing argon those with high manufacturing operating expenses or overhead costs. These costs may result from a divers(a) range or products, intensity of capital, or vertically integrated organization of manufacturing. occupation base costing may attend to such businesses not solitary(prenominal) to empathise but alike to control their operating expenses so as to increase their revenues (Oà ¢â‚¬â„¢Guin, 1991, p. 76).\r\nOrganizations with tumescent marketing, sales or distribution costs may also reap great benefits from activity establish costing. As mentioned previously, this method of costing identifies those customers that are most profit equal to(p) from those that are least profitable. This provides insight to management on how to better operations. With activity base costing, such businesses may be able to answer questions such as: â€Å"What discounts are appropriate for large orders? What size accounts should salespersons no longer call on? How effective is advertising to different markets?\r\n” (O’Guin, p. 76). Firms that are experiencing soggy or low positivity on increasing sales may be suffering from growth that is unmanaged. It may in truth well be that these businesses are exchange products at losses to a number of customers. The accounting system of accurately mensuration costs, that is, activity based costing, would allow these firms to order which of their customers and products are generating revenues and which are not (O’Guin, p. 76). O’Guin describes another benefit of the activity based costing system thus:\r\n even up with a diverse product take out or customer base and truly high profitability, a company lack an ABC system is surprisingly vulnerable. product profitability probably varies widely crossways the company. Highly profitable products present an unresisting target to new market entrants. anxiety should know which products are reaping enormous margins, so they can erect barriers to entry. (p. 76). Also fit to O’Guin, the activity based costing system provides not only strategical but also tactical benefits to businesses that weapon it.\r\nWhereas benefits that are strategic in constitution may be realized only once in a aristocratic moon, for the simple reason that organizations cannot be evaluate to change their pricing, business operations, distribution or man ufacturing processes each year †tactical benefits may be realized constantly. Indeed, activity based costing could serve well businesses not only with reduction of overhead costs, but also just-in-time support, improvement of quality, decisions about design, and investment in capital. Thus, businesses that implement the activity based costing system may improve their profitability on an ongoing basis (O’Guin, p.\r\n76). In the twenty first century, companies that have a matched edge are those that economize flexibility, a trend that has been recognized as a critical factor for success since the 1990s. Life cycles of products have been shortened and focus on the customer has become increasingly important. As economies of scale virtually disappear, manufacturing plants that are successful are those that are able to quickly introduce innovative products and economically produce small quantities. Activity based costing system can help businesses tremendously to achieve t hese goals.\r\nWhat is more, this system of costing could assist businesses of the twenty first century to achieve their goal to increase employee motivation. With the activity based costing system in place, employees increase their understanding of business activities and therefore their involvement in business operations. So, for example, whenever they give away a mound of papers they would make up ones mind overhead costs, leading them to the following questions: why do we have so some bills? Why are there so many process involved in our purchase orders (O’Guin, p.\r\n76)? Thus, the activity based costing system encourages businesses to push their rates of cost drivers down. This helps in the reduction of time to setup, streamlines buying, in addition to time taken to education a product. When costs are attached to each of these processes or activities, management may not only measure but also plan improvement (O’Guin, p. 76). As mentioned before, some of these improvements may entail reducing production of goods or serve well to customers that cost more to produce or service than the others.\r\nHence, the activity based costing system may also lead the business that implements it to improve upon its marketing mix or positioning of its products. If products and customers that cost more than the others are required by the company to produce or serve in the same quantity as before, however, activity based costing system helps the organization to improve its processes in order to decrease its costs without reducing the quantity to produce or serve. After all, it is only possible to improve inefficient processes.\r\nBecause activity based costing allows the company to weigh the costs of activities against their benefits, firms that use it are in a great position to increase the efficiency of all of their processes so as to gain competitive advantages. References Activity Based Costing. (2008). Value Based Management. Retrieved Jan 27, 2009, from http://www. valuebasedmanagement. net/methods_abc. html. Cooper, R. (1988, Summer). The Rise of Activity-Based Costing †constituent One: What is an Activity-Based Cost System? ledger of Cost Management, pp. 45-54. O’Guin, M. C. (1991). The Complete pack to Activity-based Costing. Chicago, IL: CCH Tax and Accounting.\r\n'