The organizations are very important for economies and economic development, while some economists said that organizations are the life blood of any economy. This is because organizations do business in economy which provides number of benefits like job opportunity. Payment of handsome amount of a region`s tax and utilizes the domestic resources. This process continues as the employed people of these businesses contribute to the economy by spending the money from their earning, and resources needed by organizations further contribute to the economy by providing employment and capital to the vendors of the resources (Chung & khan, 2008). There are number of departments usually found in an organization and among them, the name of accounting and finance department is one of them.
Accounting and finance are two different things, like accounting is the name of recording the day to day transactions while finance is the name of utilizing the funds of a company in total. There are two different kinds of accounting, which predominantly are financial accounting and cost accounting and both of the types are essential for an organization, however cost accounting is more towards the manufacturing companies in total instead of financial based accounting.
Under the net of cost accounting, the name of Activity Based Costing (ABC) is one of them, which has its own significance as far as a manufacturing company is concerned. ABC is one of the most integral methods used by the organizations to enhance their productivity because this particular thing will decrease down the level of cost of the companies accordingly. According to the concept of ABC, cost would be incurred and recorded at the time of occurrence or more specifically it could be said that cost would have been recorded according to the activity perform.
The essence of ABC could be extremely essential for the companies to take effective decisions for the sake of the company. Inevitably, the decisions of profit maximization and cost mitigation are some of the important and vital ones from the viewpoint of an organization and it is equally beneficial for the manufacturing companies as a whole. After analyzing the cost of the activities, organizations or specifically management would become able to take effective decisions on the basis of the cost. All the decisions which are decisive for the organization depends heavily upon the cost based function, and that is why companies always try to mitigate the direct and indirect cost accordingly
When it comes to manufacturing companies, then there are number of things, in which the companies have to incur certain cost, like raw material, direct labor and factory overheads. If all of these costs would have been incurred accordingly and with efficiency, then the graph of earning would certainly increase of such companies. Operating in this way enables a company to charge the specific price for a product which they had manufactured and also enhance the level and efficiency based of the decision making (Harrison, 2002). ABC would not be as worthwhile for the service based companies as it could be for the manufacturing companies, because in manufacturing companies, the entire bread and butter of the company depends upon the manufacturing items and things while it is nothing to deal with the service oriented organizations as a whole, and the biggest advantage of this activity is getting enhancement in the decision making stance.
H. Michael Chung, M. B. (2008). AN ANALYSIS OF ACTIVITY-BASED COSTING (ABC) PROJECT IMPLEMENTATION. decision sciences , 4381-4385.
Harrison, D. S. (2002). Activity-based Costing [ABC] and Activity-based Management [ABM] Implementation- Is this the solution for organizations to gain profitability? Springer , 152-166.