The benefits of adopting abc/abm are higher for companies in competitive markets because they need accurate product costs to set competitive sales prices and earn a profit. Accurate product costs can help to pinpoint opportunities for cost savings that could be passed on to customers through lower prices.
Rather than relying on volume-sensitive allocation bases such as machine hours or direct labor hours, ABC assigns overhead costs by activity. It classifies five broad levels of activity: batch-level, unit-level, customer-level, organization-sustaining and product-level.
Refined Costing Systems for Environmental Sustainability
Companies implementing refined costing systems are better able to identify and separate overhead costs affecting the environment, and allocate those costs to activities and products that drive those costs. This can lead to a greater profitability of greener products and a more profitable company overall.
Operational Activity-Based Management
The use of activity-based management (ABM) helps companies to make decisions about which products to produce, which customers to sell to, and where to place advertising. It also provides more accurate information about the profitability of individual operations that allow managers to eliminate cost drivers that are not adding value.
Strategic Activity-Based Management
The IMA Committee on Research has found that companies that implement activity-based management systems tend to perform better than their counterparts in terms of operating efficiency and profitability. This is because they are more able to focus on the most profitable products and customers.
The adoption of ABC or ABM must be a collaborative effort between the accounting and information systems divisions of the company. It is not a one-time project, and it takes time to train staff on the new methodology and make changes to business processes. Ideally, the accounting and information systems departments of a company will be open to working with outside experts on an ABC implementation project.