As competition demands businesses to increase profitability and control costs, cost management can provide the tools, techniques, and mechanisms needed by companies to help achieve their goals and strategies. This is done by optimizing the use of resources. Cost management is a vital tool for the whole business: Its strategies, goals, processes, and performance measures.
As the need increases for higher value-added uses of information, the focus of the management moves beyond the information available in a traditional transaction processing system to more analytical applications, such as Activity-based costing (ABC) with performance management capabilities. ABC and performance management have become key tools for executives, and operational and financial management to manage the business. ABC helps manufacturers to understand their product cost behavior.
According to Computer Aided Manufacturing International (CAM-I), "Activity-based costing is a methodology that measures the cost and performance of activities, resources, and cost objects. Resources are assigned to activities, then activities are assigned to cost objects based on their use. Activity-based costing recognizes the casual relationship of cost drivers to activities."
ABC is a decision-making tool. It allows organizations to improve business performance through increased efficiency and reduction of costs. It identifies the key activities performed in all stages of delivering the product or service to the customer. It is these activities that consume the resources and these same activities that create products. Recognizing this relationship is the cornerstone of ABC. It allocates cost (or resources) to activities based on the consumption of resources (i.e., resource cost assignment).
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