Activity-Based Costing: A Tool of Cost Control

Experts say that with Activity-Based Costing (ABC), enterprises were able to improve their efficiency and reduce the cost without sacrificing the value for the customer. Even after the strong advocacy in favor of ABC by Cooper and Kaplan and many others, its acceptance rates are not overwhelming in most of the countries including India. It has been observed that even though the awareness about ABC is growing continuously, the overall rate of implementation is not that much attractive. The main reason for such a low adoption rate of ABC is because of the difficulties and complexities associated with the system. This article focuses on the various uses of ABC, the causes of low adoption rate by Indian corporate and standard implementation steps for the ABC system. Activity-based costing, as propounded by Robin Cooper and Robert S Kaplan, was one of the powerful tools of performance measurement which was originally developed to overcome the limitations of the traditional cost management system. The main problem with traditional costing system was its inability to measure accurately the actual cost of production and related services and as a result, managers were taking decisions on inaccurate data. Thus the main idea behind the introduction of ABC is accurate cost information for product/service, pricing and profits analysis, improved insight into cost drivers, accurate customer profitability analysis, cost reduction, process improvements, product mix strategy, performance measurement, and improvement and cost modeling.