ABC system stands
According to Plowman (2001), identification of actual costs in expenses incurred in the whole process of developing a product up to the final step of delivering enables entrepreneurs to find solutions in cutting down overall costs involved in these processes. To remain competitive in the market, a company is required to understand and know its sources of profits and costs and this is best achieved by the application of Activity Based Management.
Determination of level of profitability of each and every product, reasons as to why there exists differences in their profit variations, are some of the important parameters companies must apply to remain profitable by maximizing their profits while minimizing their costs. Further indicators involve concentrating efforts on activities that bring back greater rewards, insights on how to improve customer relationships and knowledge of customer response and reaction towards a particular product or service are best understood and improved by activity based management system.
The constant shifting of customer demands requires a management system that is value driven and that seeks to improve its level of customer and client relationships (Moisello, 2007). While market trends in the global trade arena have taken considerable change in terms of service and product delivery,
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Although ABC noted enthusiastic response upon its release, it dropped down in 1990’s and left room for other systems such as the Balanced Scorecard and Economic Value Added. These systems resemble the Activity Based Management and Cost systems in many ways but with little variations and improvements. It has furthermore stagnated due to the technological advancements in the management and cost evaluation sector of business. Activity Based Cost is moderately used in many parts of the globe due to the benefits that come along with it.
The England and Wales National Policy recommended the use of Activity Based Costing system to the UK Police in 2003- 04 in the policy performance assessment framework. Conclusions as to the successful application of this cost system have come up with a big nod describing it a full exploitation of available resources. ABC costing systems increase and facilitate effective budgeting by recognizing all the costs incurred and the total performance in the organization or company.
In today’s environment managers manage and focus on activities, if the activity is managed effectively, a company experiences lower unit costs and become more competitive (Ballast, Rachlin and Sweeny, 1996). Budgeting is a daunting task and its process requires accurate analysis of all the information required for its process. In this case, an organization which uses ABC system stands a better chance in coming up with the best budget which fits the organization needs and requirements thus enhancing its growth sustainability and development.
ABC costing brings out the best information which helps in contract negotiations. When a company tenders for qualification to supply a given product it produces, it is upon this particular costing system that one can come out with an adequate inside information concerning which prices to charge after analyzing all the costs involved . It is therefore very easy to know whether a company successfully negotiated for a contract which is gainful or not. Without this information which ABC costing provides, it is not easy for a company to critically evaluate the usefulness of Activity Based Costing.