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  • Michael Phillips

Knowing your ABC’s is essential to your company’s success

What do accounts mean when they talk about ABC?

Activity Based Costing. But what is it?

Activity Based Costing (ABC) is a costing methodology that assigns costs to specific activities in an organization. It is a system that identifies the activities and processes that drive the costs of the organization and assigns them to the products or services they provide.

This method is essential because it provides an accurate picture of the cost structure of an organization, which managers need to make correct decisions.

Here are some reasons why Activity Based Costing is important:

  1. Accurate Product Costing:

  2. Better Resource Management: By identifying the costs of different activities, ABC helps managers identify areas where costs can be reduced, and resources can be more efficiently used. This helps to improve the overall efficiency of the organization.

  3. Improved Cost Control: ABC provides a more detailed view of costs, allowing managers to identify the sources of costs and take steps to control them. This means that managers can better manage their costs and avoid unexpected expenses.

  4. Improved Customer Service: ABC can help managers identify the costs of specific customer services, enabling them to offer better customer service. By knowing the costs associated with each service, managers can make informed decisions about the allocation of resources and improve the quality of service offered to customers.

  5. Enhanced Decision-Making: ABC provides a more detailed view of the cost structure of an organization, which can inform decision-making at all levels. This means that managers can make better decisions about product pricing, resource allocation, and cost control.

Activity Based Costing is an essential tool for business owners and managers who want to understand the true cost structure of their organization. By accurately assigning costs to specific activities and products, owners can make informed decisions about resource allocation, cost control, and pricing. This ultimately leads to better financial management, improved efficiency, and enhanced customer service.

If you don't know your true cost structure it's time to learn your ABC's!

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