How can you use activity-based costing to increase profits?

I like the idea of ABC as a pricing strategy and have actually developed one and got favourable recognition from the management of the company some few years ago. Price sensitivity is quite common in small to med-size businesses and you found a lot of sales teams uncomfortable about price changes simply because they don't want to lose or upset their clients. ABC allows you to have full transparency with your cost and prices and helps you to adjust to the industry standards. Using ABC allows businesses to increase prices to gain the much needed profit or reduce prices to allow of much needed customer discounts while also avoiding losses. ABC also helps in budget setting process and allows businesses to set targets.

Good example of ABC application is Repair Orders (ROs) in automotive industry. There are many labour and parts sale types that can go on one RO which are then recorded in separate accounts (both Sales and COGS). This allows analysis of gross per labour sale type (and with some extra excel work can be done per job). This in turn helps to identify high gross jobs vs low gross jobs and adjust the bookings and composition of work to generate more gross. For instance, if a workshop is making good gross on regular service and poor gross on HVAC work, why not sublet HVAC to an external specialist at trade prices, add a small margin and fill the free time with regular service? Robust ERP is a must for ABC as well as the right people. (GIGO)

ABC provides perspective and area of focus in process where the major cost consumption is and corresponding return is not visible. With digital transformation going in industry ABC helps to costing benefits, if any generated through digitization or not. ABC helps to reallocate resources based on priorities and objective of the organisation to make optimum utilisation of resources.

In my experience Activity-based costing provides a more accurate understanding of the costs associated with different products or services. This can help in setting more competitive prices and increasing profitability. In addition by understanding the cost drivers for different activities, we can allocate resources more efficiently. This can help in reducing costs and increasing profitability.

I love ABC costing because it helps to identify the true resource consumption and helps to reduce costs instead of the shifting of casts that occur in budget processes.

ABC assigns overheads based on the actual activities that generate these expenses, providing a more realistic picture of product profitability compared to standard costing approaches that could equally distribute overhead across goods. This level of accuracy also helps improve planning and forecasting, giving businesses more assurance in their ability to make decisions in the future.In addition, the transparency ABC brings to activity expenses may be used as a guidepost for never-ending enhancement. By concentrating on removing tasks that don't bring value, an organisation may better uncover inefficiencies and simplify processes, hence lowering expenses. Business strategy and model development can benefit greatly from such understanding.

Identify Cost Drivers: ABC helps identify the key activities that drive costs in your business. By understanding these cost drivers, you can focus on optimizing and improving efficiency in the activities that have the most significant impact on costs.

Activity-based costing (ABC) can improve cost visibility and accuracy by providing a detailed breakdown of costs at the activity level. It enables businesses to understand the specific activities and processes that consume resources and contribute to costs. By assigning costs directly to these activities, ABC eliminates the averaging and allocation biases of traditional costing methods. This results in more accurate cost information, allowing businesses to identify the true costs associated with producing goods or delivering services. Overall, ABC enhances the accuracy and visibility of costs, enabling businesses to make more informed and effective decisions to improve profitability.

Abc method can serve as a catalyst to analyze operational efficiencies in FTE, marketing and other operational costs in comparison to revenue performance within a specific period

Activity-based costing (ABC) optimizes product mix and pricing by accurately assigning costs to specific activities, allowing businesses to understand the true costs of each product or service. This information helps in analyzing profitability, setting prices that align with costs, identifying cost reduction opportunities, and making informed decisions about product mix optimization. ABC ensures that pricing and product offerings are based on accurate cost information, leading to improved profitability and better decision-making.

Activity-Based Costing (ABC) serves as a magnifying glass for operational intricacies, allowing businesses to discern non-value-adding processes. By mapping out costs to specific activities, organizations can trace unproductive endeavors, such as prolonged lead times, redundant processes, or even over-utilized resources. ABC can also highlight the misalignment of resources; for instance, disproportionate time or funds might be invested in activities that don't align with strategic objectives. In addition, the iterative nature of ABC helps in adapting to dynamic business environments.By focusing on value-centric operations, businesses can optimize resource utilization and amplify stakeholder value.

Activity based costing is a game changer! It was able to eradicate the issues noticed with the traditional costing technique . With the ABC costing technique, companies are able to see clearly the activities that drive their cost which can in turn help them to strategies better on reducing those cost. The ABC costing technique is also very easy to use and easy to explain even to non accountants.

ABC helps to allocate expenses in a process-driven way. It allows to have a different view (in compare to object-to-object allocation) to the company expenses and product/service costs.

Identifying the Revenue from each activities of sales (products) and services (types of service) (combinely called as “Drivers”) is the key to success for attributing costs directly to those drivers. Traditional overheads allocation based on assumptions or straight forward amortisation may not yield the true / correct profitability from each driver and hence Activity Based Costing is heavily looked at by many businesses as best alternative to measure not only profitability but also efficiencies. Evolution of artificial intelligence looming at data analytics, ABC will be piece of cake for many businesses. With ABC in place, it would also help business change their budgeting methodology to “Driver Based Budgeting” Key changer!

By implementing ABC, you’re able to identify activities that incur high costs through analyzing their contribution to profits. This analysis will identify optimal levels of ‘profit yielding’ activities while at the same time eradicating/minimise the ‘less profit yielding’ activities.