Implementing activity-based costing can be an effective way for firms to increase efficiency by determining the costs associated with each product or service delivered by these firms. The process of implementation can be difficult for a company unless they have a solid system by which it follows the process of various resources being turned into finished products. If a solid mapping process is in place, implementing activity-based costing requires identifying the costs that are associated with a single product or service as well as those that can be spread out throughout the operations. It is also important to identify the various cost drivers that are factors in determining why certain products require more resources than others.
Keeping costs low is necessary if a firm wants to make a profit. Even with a great amount of sales bringing in revenue, a company can end up with a poor bottom line if it can't keep its costs under control. For that reason, an accurate way of measuring costs as they relate to various business is of paramount importance. That is what implementing activity-based costing can be a wise move for a business to make.
It is important to understand that the decision to begin implementing activity-based costing should be done with an idea of how it will relate to the company's business process. If a company isn't in the habit of accurately keeping track of its costs during the production process, activity-based costing can be hard to do. For a company that has all of its business processes accurately measured, moving to an activity-based approach should be a smooth transition.
Once the decision has been made to begin implementing activity-based costing, a firm should try to identify the costs associated with each action. There may be some costs which are direct, meaning that they can be attributed to just a single product or service. Indirect costs can be spread out among more than one product. Administrative costs are costs that are incurred in the course of doing business and should be parceled out among all products.
Measuring cost drivers are another important part of implementing activity-based costing. Cost drivers are those aspects of the production process that lead to costs being incurred. For example, producing a certain item might require the maintenance of a certain piece of machinery, so that machinery would be a cost driver. Knowing how these drivers affect the production process can lead to a company streamlining its production and being more efficient.
