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10 Myths on Activity Based Costing

Dear Management Accountants,

Activity Based Costing has not became popular in India to what ever extent it deserve. There are so many Myths as far as this concept is concerned. This concept is developed to ascertain the accurate process cost data on activities and products and can be used for accurate product cost data, cost & OH control , identification and elimination of non- value added activities etc.,.

But in practice, in India, Its adoption is very limited and heared several comments Against its use and the most common are listed below.

  • ABC systems are too difficult to implements and use:
  • ABC systems are too costly; and
  • ABC systems are too complex to understand
  • Improving our existing system will do the job:
  • All that we need are more cost centers;
  • Machine-hour systems save the time; and
  • A cost system should be kept simple.
  • We do not need more accurate product costs:
  • We know what our products cost; and
  • The market sets prices, so we do not need product costs.
  • Cost systems play a limited role:
  • We cannot do anything about fixed costs;
  • Only manufacturing costs are product costs; and
  • Product costs are not useful for managing overhead activities.

Now I request the members to examine , discuss and share their views on each and every comment on ABC given above as to whether they are correct or are only myths. Let us have very clear views on this topic since this is a very important tool for Management Accountants.

Having clear views on this topic will help us in Answering & Convincing the World about its utility in case if we intend to Practice in this field.

(Let all of us take this as a Group discussion or a project etc., and start discussing)

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santoshputhran said…
ABC is primarily allocation of overheads to the products. The efforts to collect data for cost driver and activities requires a good software and IT system. Moreover management initiatives to properly price the products.

In India, cost accounting is used in large/medium sized companies. Most of them report on contribution/margin to analyse profitability of products.

So the companies that have proper cost accounting and management reporting system will be in a position to implement ABC. Moreover they will do a cost benefit analysis of ABC system - Whether this approach helps them in decision making.
Anonymous said…

Do you guys know which organizations in India have implemeted ABC and what kind of tool they have used?
Krish said…
As I see, ABC Systems are not for day to day costing requirements. ABC/M should be used at a strategic tool to identify those activites which are driving the product cost and do performance improvements around those activites.

Unless ABC does not include the M (Managment) which is purely use of ABC data for process improvements, analysis and decision making, organization will not be able to realize the benefits.

Also, to implement an ABC system equally important to have good process enabling systems which measure driver data and feed into the system.

Many tools exist for performing ABC but the key is to ensure that these tools are not used as a regular costing devise. Typically an ABC tool need to be run on a quartely basis.

ERP systems like SAP have ABC build into CO (Controlling) module. But, it uses different concept than the typical ABC/M methodology.

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