Essay Example on Activity-Based Costing: Enhancing Production Chain Efficiency

Introduction

In accounting, the activity-based costing (ABC) system is considered by many an essential technology aimed at enhancing meaningful cost in the production chain (Mahal & Hossain, 2015). The ABC system works by assessing the cost drivers and all activities involved in the production, which have a direct implication on the price of the product. The system combines both volume-related drivers and transitional-based drivers such as the orders placed (Suthummanon et al., 2011). This unlike the commonly used traditional absorption costing that focuses on volume-related cost drivers. In affirming the vitality of the ABC system and why the budget of 50,000 is needed for the benefit of the business and the customer, the following point should be included in the justification clause.

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Benefits for the Customer

Nothing is satisfying to customers than ensuring the cost attached to the product or service matches the value. The ABC system is critical to this course. Identifying the cost drivers for each process enables an enterprise to regulate both the expenditure and the price (Pauceanu & Hisam, 2016). The system facilitates accurate pricing decisions by assessing the actual cost of production. The system enhances a better understanding of cost and overheads, which reveals the non-value adding activities. The management can then eliminate or cut down those activities that do not add any value to the product/service; thus lowering the production cost and consequently the price tag (Mahal & Hossain, 2015). By enabling the management to eliminate overheads and refocusing resources allocation to profitable activities, the system allows the company to increase productivity in a valued-based approach. Furthermore, the management can understand the customer segmentation and the products or services highly ordered, which can be crucial in making decisions regarding design, distribution, and marketing approach (Pauceanu & Hisam, 2016).

Selling Points for ABC System

The major selling points for the ABC system are on increasing profitability and overall performance in an enterprise. The system facilitates cost reduction by removing overheads, enhances pricing decisions for accurate product cost, expands the analysis for costing activities over and beyond volume-related variables, and improves cost management (Mahal & Hossain, 2015). The improvements are related to ensuring the customers do not pay excess for their product of services, which can improve customer purchasing capability, customer loyalty, and customer satisfaction.

Conclusion

In conclusion, the ABC system has a direct relation with improved customer services. The management can then move on to secondary investment such as revamping store layout using the resources saved through the elimination of overhead and unnecessary activities.

References

Mahal, I. & Hossain, A. (2015). Activity-based costing (ABC): an effective tool for better management. Research Journal of Finance and Accounting, 6(4); 66-73

Pauceanu, A.M. & Hisam, M.W. (2016). ABC method contribution to business performance. International Journal of Applied Business and Economic Research, 14(1); 511-520

Suthummanon, S, Ratanamanee, W. Boonyanuwat, N. & Saritprit, P. (2011). Applying activity-based costing (ABC) to a Parawood furniture factory. The Engineering Economist, 56(1), 80-93. https://doi.org/10.1080/0013791X.2010.549936