Typical Uses of Activity Based Costing
There are two main reasons why managers undertake ABC/M projects; explicitly to save costs – or more generally to provide support for decision making at both the strategic and operational level.
Initiatives to save costs may be variously described as downsizing, right-sizing, business process review, re-engineering, process improvement, shared services or a host of other titles. Regardless of their title, the objective is to ensure that the enterprise has a resource base that is efficient and cost-effective.
These projects may be short-lived with the purpose of achieving a step change in costs – or may be ongoing providing costing information to drive continual improvements across the enterprise. But an increasing number of enterprises are deploying ABC/M to reliably identify true end-to-end product, customer or channel profitability. Using the ABC/M information, such enterprises are able to make informed commercial decisions such as:
- Pricing their products and services more accurately
− Identifying the most profitable groups of customers to be the focus of future CRM activity
− Identifying how to price sales coming from e-commerce against regular business
− Providing detailed costing information as the basis for negotiating discounts with key accounts
Where the information generated by ABC/M is made available to front line managers to support their business decisions, it is common for them to quickly appreciate the value of the insight that it provides, acting more confidently and driving the enterprise to ever-higher levels of competitiveness. No matter what drove the initiative in the first place, it is clear that well thought out ABC/M initiatives can have a major impact on the key financial drivers of maximizing sales, increasing margins and optimizing investments, all of which impact shareholder value.
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