Advantages of ABC Costing (Activity Based Costing)
Every business owner would all like to cut cost and maximize profits. It helps you to save a lot of money while making a lot in return. Now this is not a myth because you have a lot of businesses that achieve that goal. If you want to achieve this in your organization it might take a lot of work but it is pretty doable.
One of the main techniques you can use to get this done is to practice activity based costing. What this allows you to do is allocate the right amount of cost. By having a look at the resources and the work that’s going to be involved and set a strict budget based off of that.
One of the main reasons this technique is so popular and useful is because it allows you to cut cost and prevent overspending. If you should look at certain projects at times the cost that you set out to execute that project will be quite over budget or under the budget.
As a result of that it can have negative effects on your business. By using this technique it will help your estimation to be a lot clearer and accurate. Otherwise from that you also have more advantages why activity based costing can help your organization. You can see a list of them below.
Better pricing strategy
At times we tend to price our product based off of the cost it take to create and sell it. Sometimes we price a product ahead of time and sell our product at an irrational price.
Activity based costing can help to solve this overall process. By using it you can develop a better pricing strategy and probably sell a cheaper product at a more reasonable price. That customer could feel more confident buying.
The reason being is because you will invest the right amount of money in the activities that are going into creating your product. So your overall process will be cheaper and your prices will drop and your margins will be better. It is basically a win-win situation.
When you are doing activity based costing you are always going to overlook all the different processes in dept. This will help you to properly look at all the different processes. Pick which processes needs improvement and which are not working. By solving these issues you will improve your overall processes and make them more efficient.
When implementing cost based analysis it can help you to spot products that are not bringing your organization any inherent value what so ever. This will allow you easily to eliminate them.
At times business managers even over spend on resources and materials that were never needed in the first place. A proper activity based costing plan could’ve helped them cut back on their resources to prevent waste.
A lot of persons tend to think that this strategy is only useful in estimating production cost. That’s not the case though because it can help to calculate overhead cost in other areas of the organization.
These include management processes, calculating employee’s payment plan etc.
Overall activity based costing is a very useful and strategy any business manager can implement in their organization. It will give them the opportunity to cut cost by analyzing the different processes that goes into creating a product. Lastly it helps them to create a strict budget for each activity to prevent overspending.