The company/industry’s primary objectives for implementing ABC/ABM systems. How does ABC help in cost reduction and accurate cost information?
Activity-based cost (ABC) and activity-based management (ABM) systems aimed to satisfy the necessity of accurate information regarding the cost of resource demands by individual products, services and customers. ABC also enabled indirect and support expenses to be driven first to activities and processes and then to products, services and customers. This has provided managers with a better source for decision-making by showing a more transparent picture of the economics of their operations.
The reasons to implement ABC/ABM are driven by the need to improve customer profitability, to gain accurate and relevant cost information for pricing or budgeting, to modernize cost systems, improve cost control and improve business processes, to meet current managerial needs and to improve product profitability. However, the implementation process has also disadvantages and faces difficulties such as resistance to change in firms, uncertainty about the implementation costs and about the risk of the implementation, absence of technical conditions required to successful implementation, the reluctance of employees or managers, uncertainty about the support from top management, difficulties in identifying and selecting activities and problems when collecting data for these new systems.
An ABC system gives managers information about costs of making and selling diverse products. Manufacturing and distribution personnel use ABC systems to focus on how and where to reduce costs. Managers set cost reduction targets in terms of reducing the cost per unit of the cost-allocation base in different activity areas. Management can evaluate how its current product and process designs affect activities and costs as a way of identifying new designs to reduce costs. Many companies implementing ABC systems for the first time analyze actual costs to identify activity-cost pools and activity-cost rates. To be useful for planning, making decisions, and managing activities, companies calculate a budgeted cost rate for each activity and use these budgeted cost rates to cost products. At year-end, budgeted costs an actual costs are compared to provide feedback on how well activities were managed and to make adjustments for underallocated or overallocated indirect costs for each activity.
* -Case of study-The Implementation of Activity-based Costing in Chinese Commercial Banks
Commercial banks will benefit significantly from adopting Activity-Based Costing system when they want to improve their competitiveness. The increasing competition that Chinese commercial banks are facing as a result of globalization and the rise of foreign banks carrying business in China, has been determinant in the process of implementing series of advanced management methodologies. With them, Chinese banks expect to improve management ability and take action to the competition. All of these make the implementation of ABC system possible.
* The Necessity of Adopting ABC in Commercial Banks
Helping banks to boost their competitiveness
A commercial bank can be defined as a combination of various activities. According to the theory of activity-based costing, products and services consume activities, and activities consume resources. If we enhance the efficiency of activities, the cost of a product or a service will be decreased. Implementing ABC system, activities will be divided into two parts, value-added activities and non-value-add activities. It is helpful for managers in commercial banks to focus on eliminating the non-value-added activities using this kind of classification method. Reducing the unnecessary resources wastes by enhancing the efficiency of activities, banks’ competitiveness will be boosted.
Supporting value management with ABC system
Maximum of enterprise value is the...