Activity-based costing is a methodology for precisely allocating overhead costs by assigning them to activities in global business companies. Once charges go-to activities, the values represent the cost objects that use those activities. The system helps in the targeted reduction of overhead costs. ABC works best in complex environments, where there are many machines and tangled processes. There are some advantages of activity-based Costing for international businesses. Conversely, it is of less use in a streamlined environment where production processes are abbreviated. Lastly, it helps international business companies to reduce their operational costs and become profitable while remaining efficient and productive.
ADVANTAGES OF ACTIVITY-BASED COSTING TO INTERNATIONAL BUSINESS COMPANIES
There are several advantages of activity-based costing to business with a global outlook. Firstly, it helps to reduce costs by providing meaningful information on the opportunities available for reducing costs. Hence, the management can make the quality decision by knowing the nature of each event. Some expenses are termed as non-manufacturing costs, for example, advertisement. Even though the advertisement is a non-manufacturing cost which constitutes a significant portion of the total cost of any product. These non-manufacturing costs are easy to allocate due to the relationship between prices and their causes. Therefore, it ensures that international business companies are cost-efficient.
REASONS FOR INTERNATIONAL BUSINESS COMPANIES
International business companies have used Activity-Based Costing (ABC) in previous profitability studies. The studies help them to decide which products or customers to cut or keep. But activity-based Costing can be much more than a superior accounting technique that shows the money products make. ABC helps in continuously rethinking and dramatically improving not only products and services but also processes and market strategies. To use ABC in that fashion involves managing in a radically different way. And that, of course, means the people in a business—from the CEO to frontline workers—must change drastically, too. The advantages of activity-based costing for international business companies show the efficiency of the ABC tool.
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