Activity-based costing (ABC) is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” as well as variable costs. Activity-based costing is mostly used for internal decision making and managing activities while traditional costing method is used to provide data for external financial reports. Most organization uses activity-based costing as an addition system for using traditional absorption costing as sometimes the traditional cost system misleads the product’s profitability. In a company, there are many products on sale, if one product is sold at a high price with low product margin and a product with high product margin at a low price, it may result in a loss. In addition, due to the reason that cost drivers and enterprises business may change, activity-based costing analysis also needs to be revised periodically. This amendment should be prompted to change pricing, product, customer focus and market share strategy to improve corporate profitability.
Importance factors that lead to successful implementation in activity-based costing
Firms today are trying to introduce activity-based costing into their system, however, some firms are unsuccessful in the implementation, which later result in abandoning the ABC system. According to research, the reason of failure ABC implementation in People’s Bank of China is due to lack of a clear business purpose about the implementation, lack of education about ABC, poor ABC model design, lack of participants, individual and organizational resistance to change, and few outsourcers available. To solve these problems, top management support and cross-functional involvement are required. Top managers are important characters to motivate all employees to embrace the need to implement ABC. In addition, they should also ensure that ABC data is used to help evaluation and in rewarding employees. If top managers do not use ABC system to evaluate and reward employees, abandonation of the system may be resulted as employees felt the ABC system is unimportant. To successfully implement ABC system, cross-functional involvement is also essential since employees from different department that are using ABC system possess knowledge of the operations that is needed to design an effective ABC system. It decreases the possibility of intransigence since employees feel like the they are important and included in the implementation process. People’s Bank of China failed to implement ABC system because employees in the company do not transigence with the ABC and the restriction of China’s rules. If People’s Bank of China understand the importance of top management support and cross-functional involvement, it would be possible for them to implement ABC system for improvement of the banks.
Activity rates help targeting improvement
In activity-based costing, an activity is any event that causes the...