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What is Activity Based Costing and when should you use it?

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There are so many improvements that need to be made to businesses in order to help them survive. One of the methods that you have to consider using is a production processes known as Activity Based Costing. It's one of the best ways to make technical improvement to the company and to also reduce the manual labor costs you have to deal with.

The various problems of standard costing can cause a problem with your companies timeliness or with other things such as the value of your product as you have wrong or invalid numbers. It is also difficult to deal with thanks to problems that can happen like having a machine break down or another big problem like losing employees for several months.

With Activity Based Costing you will be able to see if a flat rate fee for your companies services is providing you with the right outcome. The flat fee or unit costs as many call them do not provide you with a true product value. Unfortunately they end up hiding some of the inefficiencies you have to work on and they can also lead to other concerns like not having enough inventory space, having too much inventory space, etc. This disconnect can make it impossible for you to get the true value from your products and this can be hard to understand as to how you go about fixing it for the future.

The costs of your business are vital to it's growth as you cannot move forward with the future of the company if you have too many expenses to worry about. They can wreck havoc on your cash flow and they do not always provide you and your customers with the type of value you need. In order for you to be able to manage your business costs correctly you need to understand each of the costs and how they can be altered or changed in order to create value to your business.

Overhead expenses do not just come from understanding the volume of sales only. Overhead expenses are based on a number of different factors and cost drivers are another aspect that come in addition to volume. The shift is that you now need to work on understanding the customer needs and wants and it's not always based upon the functionality.

Why do so many businesses use Activity Based Costing to help them with their business? There are several factors that aid in helping you to strengthen the financial outlook of the business. The main reasons are because it helps you to understand and identify every one of the overhead costs that you need to deal with. It will also be able to teach you how to control costs as you can identify each of the cost drivers for the different activities.

Some of the other common reasons why companies turn to Activity Based Costing is for the ability it gives you to find customer segments along with distribution channels and project needs. The overall help of it makes it much easier for you to understand pricing along with product and service mix for your industry.

Similar to the methods you use to improve safety and to try and keep your business running in a functional manner you need to turn to it for continuous improvement. It is one of the best ways to go about changing your processes in order to bring in higher revenue projections and actual revenue. As you are able to understand what the different cost drivers are, it's easier to figure out where and how to outsource and which activities need to be reduced or cut from your budget.

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