The Impact Of Activity-Based Costing Techniques On Firm Performance

ABC Method for More Precise Results

ABC method is a simple method that derives precise results that can be used by the management for apportioning the overheads to their respective activities and also in decision making. ABC method provides better utility as compared with the traditional costing method. It overcomes the shortcomings of the traditional costing method. Activity based costing method allows the organizations in decision making. It allows the company to survive and combat intense competition prevailing in its industry. The shortcomings of the traditional costing method can be resolved by incorporating ABC method. In conventional costing method the overheads are apportioned to all the activities while in the case of ABC methods, the overheads are allocated to their actual source. Activity based costing method may affect the performance of the company but it also allows the analysts to identify the reasons and areas owing to such performance that needs to be taken care of by means of taking required valuable decisions.

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 The five steps that can be used to calculate costs by Activity-based costing method are discussed below-

First step- the analyst should trace all such activities that consumed resources so as to develop a particular product or service. By doing this the analyst will be able to calculate the costs that were generated by activities in the production of goods or service.

The second step- In the second step, it is required for the analyst to apportion the indirect costs and assign them to its respective activities. Creating cost pools for each and every cost item shall help in the allocation of overheads to their respective activities.

The third step- In the next step the analysts are required to identify all the cost drivers and the reasons behind the incurring of costs as well. This is because that the cost drivers help in the tracing of unnecessary costs and identification of improper pricing of goods or services (Vaitilingam, 2010).

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Fourth stage- Next, the analysts are required to procure and evaluate the overhead absorption rate for every single cost pool.

Fifth stage-  The analysts are required to assign all the indirect costs to their respective sources depending on the resources consumed by such activities in the production of goods or services.

  • Expenditure control

All the processes and the procedures followed with respect to cost are categorized under this method. This method provides an overview of the whole system which helps the company management to take serious steps about the expenditure control and this is the reason that this system of control costs more than the old conventional one which was commonly used. This system helps to categorize different costs in order to understand them with ease (Robinson & last, 2009). The main focus of the system is to display all the cost categories which will help to cut off extra or bogus expenses from the company field which will yield more positive result from the company’s part (Drury, 2013). Activity-based costing system can be attained by a company if this method is sincerely followed and obeyed with.

  •    Section wise analysis

Five Steps for Calculating Costs with ABC Method

The section wise analysis is done which relates the expenses actively or passively put up with the company’s processes. It is to be noted that when the activities or tasks in the company are dealt with and funds are allocated to them, it seem s that all the tasks belong to the same nature and so the cost wise categorization becomes somewhat difficult (Horngren, 2011).   

  •    Focus on the process

The adoption of activity-based costing sees that it only focuses on all the process and the activities going on in the company but there is no extra segregation with respect to cost but after the disclosure of all the activities the company can itself find the weak link and thus eliminated the extra bogus costs (Drury, 2011). The detection of any such passive or extra costs by the management can be easily dealt with by following the back trail of the costs and making a core plan to eliminate the same from the company’s field which will increase the efficiency of the company as a whole

  •    Updated techniques

It can be observed from the current situation that the competitiveness in the banking sector has increased and this is why there was the need for the introduction of new costing techniques which would give different companies an edge in the market. These new techniques are efficient enough that they will themselves increase the positiveness of the company which will thereby help the company to increase and raise its financial reputation and also to provide maximum benefits and wealth to the investors and also to the third party fund makers (Horngren & Foster, 2008). Gathering of data by this system will also help the company to simultaneously increase the profit percentage of the company as well.  

Case Study 1



The impact of activity-based costing techniques on firm performance. Journal of Management Accounting Research


Kennedy, T., & Affleck-Graves, J.

Year of publication



Literature review

Background of study

Because of the above mentioned loopholes, it is important for companies which want to have a strong costing pillar to adopt the ABC method of costing in the managerial system. All the methods and the process and the target of such procedures must be equally noted and paid attention to by the management so that they can follow the trail of eliminating any passive costs and to focus only on the primary objectives and the expenses involved in the respective fields (Kennedy  & Affleck-Graves, 2001)   


The structure of activity based costing can be explained in a way that it has the power to expose and finalize all the expenses incurred to different projects and tasks and also looks after the labour pays and plans the way to get the maximum effort put of everyone. All the objectives which is to be attained by the company can be done if these techniques are followed which will also led to ease in decision making processes (Kennedy  & Affleck-Graves, 2001)

The need of the hour with respect to the regional banks is that they are eager to find a technique which will help them to maximize their profits and wealth and thus they will able to serve their customers at their maximum capacity. It is also the bank’s respect talk to deliver the best and the more accurate services to their customers. Following of the above factors will help the bank to keep up or increase their respect and will also they will be capable enough to target and reach all their goals. All the minor, as well as the major cost of the production unit, should be noted down so that the price set for the same can be compared to the original and the natural cost price from the company (Kennedy  & Affleck-Graves, 2001). To achieve all the above factors there are many trails and developments going on to produce a new technique which will be healthy and sufficient enough to cope up with all the working and the desires of the company’s management and system.  

Case Study 1



Innovation action research: Creating new management theory and practice. Journal of Management Accounting Research


Kaplan, R. S

Year of publication



Literature review

Background of study

With the help of ABC method analysts are able to identify and allocate indirect costs to their respective source depending on the resources consumed in order to produce goods or services. ABC method allows the management in identifying all the sources that has utilized resources so that the same can be apportioned to its respective source (Kaplan, 1998). With the help of ABC method, the analysts can trace indirect costs that were unnecessary and avoidable so as to regulate the costing of its products or services. Activity based costing method is a very popular method around the globe as it is universally accepted by organizations for various purposes owing to its multiple traits


ABC method allows the apportionment of indirect costs to their respective activities, unlike the traditional costing method. This forms as a basis of decision making for the management of the company as the results derived from the method are very true and reliable. It also allows the management of the company to segregate costs into direct costs and indirect costs. ABC method also helps in detecting any unwanted costs that are incurred in the development of products or services and in order to eliminate or reduce the same, the management can incorporate valuable decisions and various measures (Kaplan, 1998). As the results are precise the actual values can be easily derived. Activity-based costing method also helps in evaluating the cost of damages that have or could have occurred. Consumed power, production orders, etc are some significant cost drivers in activity-based costing method.

Case Studies Show Effectiveness of ABC Methods

Owing to the difficulty faced in the identification of indirect costs there are chances for the analysts to consider them while evaluating the actual value of a product or services. Taking labour expenses and machine expenses into consideration one can say that these expenses are dependent on machine hours and power consumed (Shim & Siegel, 2009). With the help of the ABC method, the management of the company can trace and diminish costs that are unnecessary, therefore, helping the management of the company in taking valuable and effective decisions (Kaplan, 1998).




The ABC method can be seen to form an easy link between the sources and the tasks using up the sources after keeping the expenditure involved aside and also considering the amount and the efficiency of the output produced by the process.      


Activity based costing method is designed in a manner keeping the present market scenario in mind. This is why it is gaining worldwide popularity and is preferred by companies over traditional costing method. Practicality, originality, implementation costs, etc are few denominators that can be considered by the companies in calculating the effectiveness of the activity based costing. The implementation of traditional costing methods can curve out such results that reflect huge revenues for the organizations


Implementing of ABC method will make the efficiency of the banks reach a new level and at the same time the interests of the shareholders will also be safeguarded. Implementation of ABC method will also make it convenient for banks to meet the demands of its customers and design plans, schemes and policies in the best interest of its customers. Also, the banks will be able to make better decisions based on the results ascertained from activity based costing method.

Attention should be paid to the fact that the activity based costing technique will not only help the bank in increasing their profit percentage and to fill their desires but will also provide an edge over the other banks in the market. Allocation of particular expenditure and the recognizing of the same has been useful for surviving in the competitive market. This is particularly a way in which the accounting of the bank can reach a whole new level and thus this will not only increase the profit percentage of the bank but also provide financial benefits to the investors of the same and will maintain the reputation of the bank in the market (Lanen et. al, 2008)



Nature of Industry

Considering the practicality of the present scenario, it can happen that the implementation of ABC method might not be beneficial for the companies but still, the companies are advised to opt for ABC method owing to the preciseness of the results that are derived from using the same. The companies should evaluate the results from both methods and thereafter compare the results derived from them for the purpose of making valuable decisions so as to trace any information that can be harmful to the image of the company and can impact its goodwill in the coming time (Larry & Christopher, 2012).

Activity-based costing method allows the companies to survive the competition in its industries. In order to deal with the competition, pressure and workload existing in the banking industries it is required for them to incorporate such other strategies especially the undertaking of appropriate costing methods. It is due to the fact that better the market shares better will be the wealth of the shareholders.

Focus on person and activities

Conventional costing method is less time taking as compared to activity-based costing method. The intuitions are believed to be the basis of traditional costing methods which means the chances of misallocation of indirect costs are high. This will ultimately disallow the management of the company from taking appropriate, valuable and required decisions. Accurate pricing strategies and determination of actual costs are required to be known by the management of an organization so as to determine the price of a product or service that can ultimately happen by implementing ABC method

It shall be noted that it is easier to trace direct costs as compared to indirect costs. It is due to the fact that direct costs are directly associated with product or services unlike indirect costs as they are not directly associated with products or services. The banks also derive benefits from taking action based costing method into use as banks get an opportunity to discover new banking segments as well. The method also allows the bankers to come across various facts that are related to incorporating new segments. It also helps the organizations in facing the immense and extensive competition in its industry and outperforms its rivals. This happens

Half knowledge or misstatements about the activities of the company can also be handled by the adoption of the activity-based costing system. Apart from the traditional conventional method which used to directly allocate the funds to the task, this method questions the task that what is the amount of fund that should be allocated and why which eases the company’s ethics of work and detection (Needles &Powers, 2013). Also, the resources used up by the company tasks can be easily found out by following the back trail of all the activities if they are processes under the ABC method.

  • From the very starting, the report can be seen to focus on the facts related to the efficiency of activity-based costing and the positiveness in the decision making process of the company which will help the company to thrive in this type of competitive market. Cases in which a false or threat output generation was made has also been stated because in that case, the activity-based costing was unavailable to reach its limit.
  •    All the procedures and the expenditure involved with the same is disclosed by the activity-based costing technique which will effectively help the management to gain knowledge about the same and to eliminate all the extra and bogus costs incurred by the company regularly (Needles, 2011).
  •     The outputs produced and delivered by the company along with the processes are the pillar that determines the success and the efficiency of the activity-based costing. This particular technique and the plans inscribed in the same has been very positive with respect to the practitioners and scholars in the costing field (Vanderbeck, 2013).                                                           
  •    From the above discussions and explanations, it can be said that this development of latest techniques has supported the scholars to comply more with the undertaken projects and to work according to the specifications of the client and to benefit themselves as well as the respective company so as to increase the company’s financial equation (Venanci, 2012)


From the above report and its explanations, it can be clearly understood that the technique of activity-based costing has been proved to be much more efficient and beneficial from the traditional methods in numerous ways which were not working out in today’s current situation. Attention should also be paid towards the fact that this technique works well for only for manufacturing industries and may cause misstatements when used in any other field. This method has been necessary to adopt by the management to reach the goals and bring the company up to a whole new height.   Many new ideas and techniques related to the payment gateway in the industrial sectioned have been seen over quite a long time now. Many methods have now been created which leads to successful payments even when the gateway system fails or the payment is due.


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