Impact of Activity Based Costing Technique and Abcm on Various Managerial Decisions (A Conceptual Study)

Abstract

Through this study, the objective is to study the effect of implementation of Activity Based Costing (ABC) and the information generated on various types of decisions made by managers. ABC system of costing, when implemented, gives visible benefits for any firm. First, for implementation, all the components of cost are thoroughly studied, that generally are not done when we follow traditional method of costing and we distribute certain overheads for cost calculations on absorption or apportionment basis. Secondly, the complete process is scrutinised in detail and analysis is done to check the efficiency against the predefined benchmarks. Use of information based on ABC can increase the efficiency, closing down of unprofitable segments and to utilise the available resources in more profitable operations, which ultimately leads in cost reduction and increase in revenue and in turn, better financial performance. However, initially the implementation of ABC technique for estimation of cost may involve a lot many challenges. An ABC analysis may not be popularised because of two key reasons. First, it may not reveal every time any new information to the management that it already knows before the ABC analysis, and secondly, it may require the hiring of outside specialists/consultants for implementation and also the change in organisational structure which some time is resisted by the management, as management may not be willing to work on recommendations of an outsider’s data and analysis which may significantly be different from the earlier adopted traditional costing techniques. However, ABC system can be a more accurate way of costing and can go a long way in managing pricing, profit and revenue, taking decision relating to product mix etc. in both manufacturing and service sector.