Free Accounting Dissertations - However, It Is Almost Difficult To Eliminate Completely All Those Non-value
However, it is almost difficult to eliminate completely all those non-value added activities. Most organisations run up to 20 to 40 % of their total expenditure through non-value added activities.
Despite some of the drawback associated with ABC, most managers who have implemented find ABC far too superior to traditional costing system. To summarize ABC following are some typical benefits of Activity Based Costing are:
It can accurately predict costs, profit and resources requirements associated with changes in the production volumes and costs of resources.
It can track costs of activities and work processes.
It can equip managers with cost intelligence to stimulate improvements.
2.1.2 Activity Based Management (ABM).
Activity Based Management refers to the actions managers take based on the information from an activity based accounting system to increase profitability. The action may represent operational improvements to high cost processes, changing product prices and product mix, and restructuring customer relationships. It aims at improving processes, particularly the processes performing batch and product-sustaining activities.
It is used in conjunction with activity based costing to improve processes and reduce costs. Taking ABC into consideration, managerial activities can be categorized into two distinct managerial objectives Operational ABM and Strategic ABM. Operational ABM sets aim at reducing the cost of activities and to increase capacity by improving efficiency. It begins by possible improvements to existing processes and allocating resources to carry them out. The next stage is to monitor the results of each such activity. The results are generated by ABC which can then be used to verify and reduce spending on operational activities. The divergence or variance between the actual and anticipated resource consumption would suggest whether or not strategy have materialised or not.
Strategic ABM, on the other hand, aims at increasing the demand for high profitability activities and to decrease the demand for low profitability ones. Activity based costing, largely due to its individualistic estimation, can provide information on the profitability of individual products and customers. For example, this allows marketing manager to develop strategies to market distinct sales mix towards more profitable products and more profitable customers.
Assessing both these ABM objectives, we can summarise that, it is aimed at profitability by reducing cost and also to eliminate those activities that are least required or those that have least impact over the product’s overall production stage and in the final marketing and sales stage.
2.1.
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