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There are some universal truisms that apply to all businesses The first of these is that a business must be able to provide products and services at a lower overall cost than the competition The second is that the inflation-adjusted cost of production and logistics must continuously decrease Knowing the true cost and profit picture of each product is the third Finally understanding and managing cash flow is as important as profit Each of these areas involves decision-making practices that have a profound impact on the organization Cost cutting is often an area of decision-making that can start a cycle of decay if the correct decisions are not made Cost cuts that erode the competitive posture of the company are the cause This can result when decisions are made using traditional financial accounting data rather than control-oriented data Activity-Based Costing ABC arose in the 1980s from the increasing lack of relevance of traditional cost accounting methods The traditional cost accounting methods were designed around 1870 - 1920 and in those days industry was labor intensive there was no automation the product variety was small and the overhead costs in companies were generally very low compared to today Comparing the traditional cost accounting with the ABC methods there are 3 major differences 1In traditional cost accounting it is assumed that cost objects consume resources whereas in ABC it is assumed that cost objects consume activities 2Traditional cost accounting mostly utilizes volume related allocation bases while ABC uses drivers at various levels 3Traditional cost accounting is structure-oriented whereas ABC is process-oriented Consumption of resources versus consumption of activities ABC acknowledges that you cannot manage costs you can only manage what is being done and then costs will change as a consequence In traditional cost accounting however the underlying assumption is that costs can be managed but as most managers have found out the hard way - managing costs is almost impossible The
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