Activity-Based Costing Organizations That Need Help Being

Activity-Based Costing

Organizations that need help being more efficient and cost effective look to different concepts for help, one such concept is activity-based costing. Activity-based costing is used to manage an organization better and is meant to help with decision making by coming up with better information about the cost and performance of activities, resources and objects that consume resources ("Activity-based management -- an overview," 2001). This essay will discuss ABC and activity-based management as well as how ABC is different from other concepts and explain three of those concepts; lean-manufacturing, just-in-time and theory of constraints.

ABC is used by the manufacturing industries, the financial service industry, and communications and public service sectors (Blocher, 2008). Activity-based management followed activity-based costing. Taking data from ABC, it uses it to manage the products, portfolios and business processes of the organization in better ways ("Activity-based management -- an overview," 2001). There are other systems that attempt what ABC attempts, but they differ in some aspects. A lot of other systems are volume-based as opposed to activity-based. The information gathered by ABC is based on activities performed for the cost object instead of the volume of products produced, which has little to do with the consumption of resource cost (Blocher, 2008).

Activity-based costing tends to be most beneficial for larger industrial firms with more than one product and/or services (Blocher, 2008). Companies using ABC benefit because the control they gain over activities allows them to control cost ("Activity-based management -- an overview," 2001). Companies besides large industrial firms can successfully use ABC. One such company is the Hospice of Central Kentucky. After using activity-based costing, the hospice negotiated with their insurance company and got better payment terms more beneficial for them and were also encouraged to educate their referral sources to bring patients to the hospital before acute care became necessary, potentially saving them from doing more expensive procedures (Chung, n.d.).

There are other systems used by organizations to help with efficiency and reducing costs. Three of which are lean-manufacturing, just-in-time and theory of constraints; all described in the table below.

System

Description

Benefits

Lean-manufacturing

A philosophy used by management to pursue the continual elimination of waste in every business process through kaizen, or small, incremental improvements (Gembutsu Consulting, 2007).

Elimination of waste; Improved quality; Reduced inventory; Less space required; Enhanced flexibility; Identifying future kaizens simpler; Safer work environment (Gembutsu Consulting, 2007)

Just-in-time

A production/inventory control system in which materials are purchased and units are produced only as needed to meet customer demand ("Just in time (JIT) manufacturing and inventory control system," 2011).

Inventory funds used elsewhere; Areas for inventory storage used more productively; Throughput time reduced; Defects reduced ("Just in time (JIT) manufacturing and inventory control system," 2011)