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Understanding ABC for Service Companies
ABC (Activity Based Costing) is a part of cost management. It deals with how to manage and minimise costs during the production of a quality product. Now a days service companies are having issues regarding generic cost accounting systems. This indicates that the costing in service companies should be more futuristic. Activity Based Costing is the perfect solution for this kind of analysis.
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Importance of ABC for Service Companies
ABC helps the company to easily estimate the cost elements of the entire activities, services and the products. With the help of this, the company can decide to identify and eliminate the unprofitable and it leads to a reduction in prices of products and services which are overpriced. It also helps to identify and eliminate the production or service process which is not effective and allocate processing concepts. These concepts lead to the very same products same product at better yield (process re – engineering aim).
Activity based costing identifies a relationship between the products, cost and activities. Through this relationship, it assigns the indirect costs to products less arbitrarily than the traditional methods. Management and office staff salaries are some indirect costs which are difficult to assign to a particular product produced. In order to support the annual budgets and determine the customer profitability, activity based costing can provide detailed cost information. It can also enable the management to check if the performance can be maximized and growth strategies realized. ABC is a modeling process.
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