Profits through Activity Based Costing

Most people are aware about importance of cost control in achieving profit targets. However, very few organisations are prepared to put in the required efforts to control the various elements of cost. Most of the organisations stop at controlling material wastage or production costs like labor power etc. No doubt, these are major elements where costs can be saved. However, other elements are also important if really competitive price is to be worked out.

One has to consider the whole sequence of the processes including process of management and consider all the activities incurring costs in terms of materials, labor, energy, demand on resources etc. This should include all functions of management like marketing, administration, accounting ,personnel, materials, production, quality assurance and management,finance, development, MIS and so on. All the activities where there is no value addition should be preferably deleted from the sequence unless they are important from some other point of view.

When all such activities are removed from the process sequence,process becomes healthy due to elimination of fat. Next step is to have targets /budgets for process controlling parameters based preferably on internal benchmarking followed by timely monitoring of results,corrective actions like feedback and control and then performance evaluations and rewards.

When organisations pass all these steps people get motivated to improve the profits even going out of the way. Is it not very logical that if we carry out the right things in a right way eliminating non value added activities we are definitely working efficiently and effectively to satisfy our customers: obviously improving profits for the organisation.