Cost accountants know that traditional costing can skew their measures of product production costs. Thus, many firms turn instead to Activity-Based Costing.
y must understand product costs accurately and in detail. This kind of information is essential for planning operations, pricing, and evaluating business margins. For product cost data, management relies on the firm's cost accountants. But how, precisely, do the accountants develop this information?
Why Adopt Activity-Based Costing?
The Income statement gross margin is in fact an average for all products (or entire product lines). The real gross profits and gross margins for each product can tell a very different story: A high overall GM, for instance, can obscure the reality that the firm actually takes a loss on particular products. The problem is that traditional product costing methods do not always show particular product costs accurately.
Managers turn from traditional costing to activity-based costing driven by a keen want to improve costing accuracy—get closer to the true cost and true profitability—of individual products and services. They are also moved by a wish to understand better the true costs and ROI from projects or other initiatives.
Companies Try ABC When they Need Accuracy
Companies try out ABC in their own environments to find out how well the method:
- Identifies products that are truly unprofitable.
- Finds the true costs of products to support pricing policy.
- Reveals truly unnecessary costs for elimination.
