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Activity based costing is a system that recognizes undertakings in a company and attaches the total cost of every undertaking to all outputs going by real consumption by each. Through this method, a company can make an estimate cost of single services and production with the intention of recognizing and discarding products which incur losses and reducing the prices of the expensive commodities.
ABC, in a company is basically used to enhance understanding commodity and cost of customer and profit making. In this way, ABC has widely been used to back up decisions such as reaching at reasonable prices among others. To easily identify how activity based costing operates let us look at Maxis company which deals with production of goods X1 and X2. By use of activity based costing, the organization will be in a position to tell the total breakdown of the cost incurred in a bid to produce the two. Commodity X1 will be expensive to produce due to the chemicals used and special skilled personnel are required for production of the same. Commodity X2 does not require specially trained personnel and the chemicals are equally cheaper.
Using ABC, the workers can shed some light on costs incurred in production of X1 and X2. This will further assist the management to closely look at cost and easily point the undertakings that increase and reduce value. Eventually, going by this, Maxis enterprises can easily implement the improvements and profit can be seen. This is a routine system in scrutinizing total cost incurred to minimize and do away with those unnecessary activities that do not bring profits. With product X1 being expensive to produce, the management will reduce the overall cost of X1 to have more of X2 as it is cheaper to produce and will sell faster than X1.
Through activity based cost, Maxis management will understand market requirement for quality commodities at good prices which are competitive. Looking closely at profit brought by the commodity and the consumer's related profit, ABC system has added effectively for the decision making. Maxis management is able to improve their being efficient and minimize the cost having not to betray the customer's value. They can know the effect of reducing and confirming the savings attained. All in all the ABC system is not a simple task but can be very helpful.
X1, which is expensive to produce in the long run can be called a business detractor at Maxis enterprises given that it does not seem to sell very fast. X2, less to produce and fast selling at the market is the company's contributor. Through the application of activity based cost the management can equip the employees with the cost intelligence to enhance the two products doing well in the market. This is through marketing mix. This regards to place, promotion, price and product. The idea behind is actually simple, Maxis management can produce new products in the market by varying the mix of chemicals ending up with a product which is a mix of X1 and X2. On doing this the management should shift focus to product promotion. This will create awareness of the new product existence to their customers. In the same breath, Maxis can mix the prime colors of the two products to come up with a specific color. This will change the mind of some customers who are easily attracted to colors.
The management at Maxis can also work on the mechanism at which their products are delivered. If in the past they have been using the long process of following the channel of producer to the wholesaler and finally to the retailer who will sell to the customer, it will be advisable for them to take the products to retailers. This will eventually reduce on the cost incurred and more products will be sold. The longer the channel, the higher the price of the commodity and little sales are made.
Activity based cost will facilitate comparison of Maxis enterprises systems and performance of the best practices from other companies; this is in terms of quality, cost and time. The improvements being recognized from such are meant to improve doing things faster, cheaper and better. With the two products X1 and X2, Maxis will recognize the best organizations that produce similar products and compare notes to know how they do it better. Having done that, it will allow the management to make improvements or acquire special methods focusing on maximizing performance. This should be done continuously for Maxis to improve tremendously.
Maxis, by use of activity based cost will be in a position to identify wastage and those products which do not add value in his company. Once that is done, it will be easier to reduce the wastage to maximize profit and eliminate the non value commodities. On the same note it enables the management to know on which goods need to be advertised so as to increase sales. In case of Maxis, X1 product will require to be advertised to create more awareness about its existence. This will eventually alert the customers on its benefits, use and lastly the prices which might appear quite affordable on advertisement.
Finally, activity based cost will assist in predicting profits and transitions associated in production volumes and structure of the company. The company structure is very important in that it gives an impression of what the management is. Maxis structure will need to be reviewed and maximize production of X2 product. With this having been done, it will be easier to predict profits likely to be realized after all the sales have been made. Having done all that, the management should know that ABC is not static and they can create cost benefit and continue adding value to shareholders and customers.