Benefits of Activity Based Costing

What are the Benefits of ABC Costing

Benefits of Activity Based Costing: When creating products, at times if you should analyze certain processes. You would see that it could’ve done a lot cheaper. For business managers this is quite normal. Sometimes they tend to make bold predictions and over estimate on a project. As a result of that they would buy more resources than were required which can often lead to it being wasted in the long run. We also spend unnecessary money on our operations. If your company was on a budget this could be detrimental.

Some of these processes even go unnoticed at times it’s just lurking in the shadows slowly sucking away at your company’s reserve cash. If you are serious about cutting cost in your organization which is always a good thing. The activity based costing method is a valuable method you can use.

 

 

What is activity based costing? Activity based costing is basically calculating the true cost of an operation or activity in your organization. So if you are creating a product and you have already set a budget for your overall organization. To prevent wasting unnecessary cash, you are going to analyze your different processes and operations to such a microscopic level. This will help you to determine the amount of resources that a certain operation is going to need.

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These would include materials, equipment, labor etc. by doing this you are going to calculate the true cost of a certain activity and this will prevent you from overspending on a project. You have a lot of benefits of using a strategy like this in your organization. It has been used in a lot of companies to find the true cost of what it takes to create a product. So that the exact amount of resources is allocated.

Benefits of using activity based costing (ABC)

Cut cost

As stated before this technique can be used to help your organization cut cost. It will help you to spot certain quirks in your different operations that are bleeding your company money. That could’ve been used to invest in other activities that could be giving you company more value.

By calculating the true cost it would take to run an operation in your company. You will invest the right amount of money that’s needed instead going overboard and wasting unnecessary money which would’ve otherwise happen.

Operations efficiency
When it comes on to producing a product sometimes you can have operations that’s just there to suck up time and make your processes perform slowly.

By analyzing the activity of each operation in your organization. This would help you to spot activities that are not giving your organization any value. You could later terminate them in order to improve your overall operation efficiency.

Product management
Not every product you create will be a block buster. You will have some product or services that just don’t hold any value. You even have products that are just too expensive to create. As a result of that you would be forced to raise the price to justify the production cost.

If you are in a market where competitors are selling that product at a much lower price, this can cause you to lose a lot of market share. With activity based costing you could use it to analyze the cost of creating and selling a product. It will give you information to show if the profits that you are going to make off of it is worth it. If it seems that it’s not worth it, you may want to pull it out of the market.

This will allow you to invest that money into other products and operations. That’s going to add additional value to your company.

Better product prices
Usually the costs of producing a product have a huge effect on how you price it. So if your production cost is expensive you would’ve to raise the price in order to justify the process.

By performing activity based costing. It will help you to analyze your production processes to help find ways to cut cost by either taking out inefficient processes or improve the existing ones. This can allow you to price your product lower than your competition. This will eventually lead to your company having a better chance of success in your market.

Benefits of activity based costing example

Use ABC Costing for your business. Get all the benefits of activity based costing without the high cost: Activity Based Costing for Excel

Activity based costing is a helpful strategy you can use in order to help your organization cut cost and spot inefficient processes that’s not bringing it any value. If you are integrating a strict budget plan in your company. This strategy can serve you greatly because by calculating the true cost of each process. You can spend the right amount of money to get it done instead of overspending.

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