Demand Planning
activity based costing
Different Uses of activity based costing system
Activity based costing (ABC) is a method used in accounting that generally involves precise allocation of overhead costs to certain items that may be of maximum use to them. The system is usually used for processes that are in serious need of overhead cost reduction. ABC does its maximum performance in more complex environments that usually have lots of machines, products, and processes that are difficult to organize and sort out.
Uses
Its primary objective is to soundly estimate the cost factors of the entire products and operating services which may help the company to make easier decisions in eliminating the unprofitable products of the business. Or perhaps, lower the prices of particularly overpriced products while maintaining a decent profit in hopes of raising its likeability in the market. Other uses of an ABC system are listed below.
· Distribution cost – in these days, companies makes use of various distributions channels in order to sell its products. Such examples of these channels are the Internet, distributors, and retail. Moreover, the main structural cost in maintaining a consistent distribution channel is utilizing overhead costs. Usage of activity based costing allows one to make reasonable decisions on how to alter the distribution channels or perhaps eliminate the unprofitable ones.
· Margins – due to the presence of ABC, there will be proper allocation of overhead costs. This will allow one to determine the margins of the products. More importantly, businesses can utilize this especially in positioning a certain company resource wherein largest margins will be attained.
· Minimum price – prices of products are usually dictated based on how the market will bear it. The company should be aware of the product's price in order to avoid overpricing them which causes unwanted money loss. With ABC, a proper overhead cost of each product can be determined to adjust easily the product' price to yield the maximum profit.
· Production cost – there shall be an easier segregation of overhead costs, especially on large production companies. It will also provide extra information of the cost production of the different production companies.
Other things to ponder
There are, indeed, many beneficial uses of an ABC system. However, this uses only applicable in particular situations wherein the ABC system is provided a different set of data. Moreover, there are also problems regarding ABC method. One example of problems is that it requires a large cost pool volume.