1. Activity Based Costing (ABC)
There are a number of costing models used in the domain of business, and Activity Based Costing is one of them. In activity based costing, various activities in the organization are identified and assigned with a cost. When it comes to pricing of products and services produced by the company, activity cost is calculated for activities that have been performed in the process of producing the products and services. In other words, activity based costing assign indirect costs to direct costs. These indirect costs are also known as overheads in the business world. Let's taken an example. There are a number of activities performed in a business organization and these activities belong to many departments and phases such as planning, manufacturing, or engineering. All these activities eventually contribute to producing products or offering services to the end clients. Quality Control activity of a garment manufacturing company is one of the fine examples for such an activity. By identifying the cost for the Quality Control function, the management can recognize the costing for each product, service, or resource. This understanding helps the executive management to run the business organization smoothly. Activity based costing is more effective when used long-term rather than in short-term. Implementation in an Organization:
When it comes to implementing activity based costing in an organization, commitment of senior management is a must. Activity based costing requires visionary leadership that should sustain long-term. Therefore, it is required that the senior management has comprehensive awareness of how activity based costing works and management's interaction points with the process. Before implementing activity based costing for the entire organization, it is always a great idea to do a pilot run. The best candidate for this pilot run is the department that suffers from profit making deficiencies. Although one might take it as risky, such departments may stand an opportunity to succeed when managed with activity based costing. Lastly, this would give the organization a measurable illustration of activity based costing and its. success. In case, if no cost saving occurs after the pilot study is implemented, it is most likely that the model has not been properly implemented or the model does not suit for the department or company as a whole. Having a Core Team is Important:
If an organization is planning to impalement activity based costing; commissioning a core team is of great advantage. If the organization is small in scale, a team can be commissioned with the help of volunteers who will contribute their time on part-time basis. This team is responsible for identifying and assessing the activities that should be revised in order to optimize the product or service. The team should ideally consist of professionals from all practices in the organization. However, hiring an external consultant could be also become a plus. The Software:
When implementing activity based costing, it is advantageous for an organization to use computer software for calculations and data storage. The computer software can be a simple database that will store the information such as customized ABC software for the organization, or a general purpose off the shelf software. The Procedure:
Following is the procedure followed for successful implementation of activity based costing in an organization. 1. Identification of a team that is responsible for implementing activity based costing. 2. The team identifies and assesses the activities that involve in products and services in question. 3. The team selects a subset of activities that should be taken for activity based costing. 4. The team identifies the elements of selected activities that cost too much money for the organization. The team should pay attention to detail in this step as many activities may shield...
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