Sumt Gupta - Activity Based Costing (ABC) - An Innovative...

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Activity Based Costing (ABC) - An Innovative Cost Optimization Tool for Retail Sector M anagement principles have undergone drastic changes over the last century & will continue to change. Organization in all sectors are extending dimension of management to horizontal along with vertical and to process orientation along with functional orientation. Activity Based Costing is one of the extending dimensions. It accurately estimates the true cost of products, services, processes, customer segments, distribution channels by assigning cost to activities with the help of Cost Drivers. It improve the organizations work processes and activities efficiently and effectively. ABC provides the fruitful information to the management as value analysis, cost drivers etc. Activity Based Costing (ABC): A Step ahead to Traditional Costing: Traditional costing provides little information beyond material and direct labor to assist management in decision making. Incorrect prediction of cost will go away which distorts the cost reduction analysis. Traditional costing system has tracked only the purchase price i.e. cost of ordering, receiving, inspecting and other expenditure. But in present scenario the dimension has changed. Now company has 1. Heterogeneous products 2. High overhead costs 3. Diversified distribution channel 4. Intense competition 5. Research & Development. 6. High Level Customer Service 7. Brand Consciousness In these situations to survive the company; it is the need to access the cost incurred activity wise so that grey area can be identified and taken care of. Activity based costing is a methodology which assign costs to the activities involves in the manufacturing and Peter B.B Turney said about Activity Based Costing as: “It is a method of measuring the cost of performance of activities and other objects. Assigns cost to activities based on their use of resources and assign cost to cost objects based on their use of activities. ABC recognizes the casual relationship of cost drivers to activities”. In ABC the basic part is identifying the activities both support and primary activities. The main stages in Activity Based Costing are: Step 1: Identifying the functional area of organization Step 2: Identifying the activities relative to these areas in the organization. Step 3 : Allocate the cost to various activities in these areas. Step 4:
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This note was uploaded on 10/13/2011 for the course LSCM 723 taught by Professor Dr.neerajanand during the Fall '11 term at University of Management and Technology.

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Sumt Gupta - Activity Based Costing (ABC) - An Innovative...

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