Accurate and relevant cost information is critical to any organization that hopes to maintain, or improve, its competitive position. For years, companies operated under the assumption that their cost information actually reflected the costs of their products and services when, in reality, it did nothing of the kind. Over-generalized cost systems were actually misleading decision makers, causing them to make decisions inconsistent with their organizations' needs and goals, principally because of misallocated costs. Activity-based costing (ABC) is a valuable concept that can be used to correct the shortcomings in the cost systems of the past. It is a means of creating a system that ultimately directs an organization's costs to the products and services that require those costs to be incurred. ABC can be used this way because it provides a cross-functional, integrated view of the company, its activities and its business processes.
As a result, in many organizations, ABC has evolved beyond the point of simply developing more accurate and relevant product, process, service and activity costs. These organizations use ABC as a means of improving operations by managing the drivers of the activities that cause costs to be incurred. They are using ABC to support major decisions on product lines, market segments and customer relationships, as well as to simulate the impact of process improvements. Organizations involved in Total Quality Management processes are using both the financial and non-financial information of ABC as a measurement system.
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