Application of activity-based costing: Some case experiences

In present day manufacturing organizations, performance measurements play an important role in providing strategic directions and developing corresponding operational policies and methods. One such method is the activity-based costing (ABC) method which calculates the cost of activities and helps in making decisions on product mix and price for improving the utilization of resources and minimizing the cost of production. Even now some manufacturing organizations employ traditional costing methods depending upon their market forces and characteristics. One of the most important decisions to be made is about the type of costing system that would be suitable for an organization. The role of direct labour in current manufacturing environments has diminished, but at the same time the level of support services has increased. Traditional methods of cost calculation do not take into account this increased complexity and still allocate overhead costs by their diminishing labour base or even do not take into account overhead costs. Hence, there is a need for a more accurate product costing method, viz. ABC. Discusses the application of ABC and some case experiences (for commercial reasons, the original identity of the companies is concealed) with the objective to provide information on whether the system would be applicable and under what circumstances it is better suited for improving the overall operational effectiveness of an organization.