Benefits of ABC Costing
ABC or Activity Based Costing is a popular accounting methodology used for assigning costs to functions and activities depending on how they use the resources, instead of services or products. This allows resources as well as other associated expenses to be accurately credited to the services and products that they utilize. ABC does not modify or remove any expenses; it offers detailed information regarding how expenses are consumed. Below are key benefits of Activity Based Costing.
1. Enables effective planning
The ABC allows for effective planning as it assigns costs directly to activities and this makes it extremely beneficial for people involved in cost lowering and process improvement programs. Through using ABC, all the activities that form a certain process are going to be accounted for accurately. For instance, in firms that offer financial services, it is going to possible to determine accurately the expense of every activity utilized in processing loan applications from inputting data on the applications to the final approval. This enables the firm to figure out the least and most expensive parts of such a process.
2. Reduces risk
Since ABC costing mainly focuses on the processes instead of the structure it helps a firm lower its risks. This means that organizations should only keep the activities that increase the value of products and remove activities that fail to complement the products. This action lowers business risk significantly.
3. Enables customization
When accurately assessing the expenses of services and products, ABC can easily establish the profitability of individual services and products. This is particularly useful in the current economies where organizations are increasingly attempting to differentiate as well as personalize both services and products. ABC costing therefore enables organizations to customize their output to individual requirements.
ABC costing has some drawbacks also and the main one is that it is time consuming, especially if all the activities require costing.