Is ABC really helpful in Cost reduction?

A new method of cost assignment, more compatible with the increased high-technology environment in which business operates, is activity-based costing (ABC).ABC assigns costs to products on the basis of the types and quantities of activitiesthat must be performed to create those products. This costing system accumulates costs for activity centers in multiple cost pools at a variety of levels (unit, batch, product, and organizational) and then allocates these costs using multiple cost drivers (both volume- and non-volume-related). Thus, costs are assigned more accurately, and managers can focus on controlling activities that cause costs rather than trying to control the costs that result from the activities. The use of activity-based costing should provide a more realistic picture of actual production cost than has traditionally been available.

Product variety and process complexity often cause a business’s costs to increase because of increases in non-value-added activities. Simultaneous engineering (using multifunctional teams) can help firms to accelerate the time-to-market of new products and reduce the complexity and costs of these new products and the processes by which they are made.