Date of Defense
Activity Based Costing (ABC) is a newer, more accurate method of allocating overhead costs to products based on actual usage of that asset or utility. This information is then applied to such decision-making processes as product pricing, product mix planning and negotiation with suppliers. However, the potential for cost savings goes far beyond the external aspects to which it is most often applied. These ABC data can be used to improve internal processes and capital investment decisions through the use of techniques such as Focused Factories, Single Minute Exchange of Die (SMED) and Make versus Buy decisions.
Any manufacturing organization that has indirect costs has overhead, and chances are this overhead is not applied in the most accurate manner possible. With indirect costs there will always be uncertainty, but ABC can help reduce the allocation errors often found with traditional managerial accounting systems. Once these costs are accurately allocated an organization can begin the course of process improvement. Cost reductions made internally are the most retainable. They can be controlled and manipulated again in the future. For successful, long-term results, using ABC to reduce costs internally will provide a firm with numerous opportunities for increased profits through improved processes.
Stocchiero, Sarah, "A Study of: Activity Based Costing and its Role in Process Improvement" (2010). Honors Theses. 1164.
Honors Thesis-Campus Only