re relevant to the process of management. Some companies use their ABC information to re-price their products, services, or customers so that the revenues received exceed the costs of resources used to produce products for individual customers. ABC models also can be used by managers to reduce resource usage, while holding revenues constant. When resource usage is reduced, some unused capacity will be created which can then be either managed away or used to process more throughput. Demands on support resources can be reduced by taking two types of actions: (1) reducing the number of times activities are performed; and (2) increasing the efficiency with which activities are performed. Through a combination of reducing the quantity of activities performed and increasing the efficiency of performing the remaining activities, companies can maintain production throughput and, hence, revenues while reducing their demands for indirect and support resources.
The arguments favoring the ABC system are made more persuasive because of the well known deficiencies of the traditional costing approach based on fixed and variable costs. As with any system, however, the ABC system must be proved valuable in actual practice.
The traditional product-costing model includes the following elements: (1) for product-costing purposes, the firm is separated into functional areas of activity-that is, manufacturing, marketing, financing, and administration; (2) the manufacturing costs of direct materials, direct labor, and manufacturing overhead are subject to inventory; (3) direct materiel and direct labor costs are considered to be traceable directly to the product; (4) manufacturing overheads of both production and manufacturing service departments are treated as indirect costs of the product, while being charged to the product by the use of predetermined overhead rates; (5) when a single, plant-wide, predetermined overhead rate is used, overhead is...