In the era of globalization, many multinational companies are trying to capture the Indian market by selling their products at low prices. Hence, if Indian organizations have to compete with foreign organizations, they have no other alternative but to control cost. It will be feasible only by controlling the overhead costs, as we know that in majority of the cases, out of the total cost, 60-70% comprises of overheads. This article analyzes how cost can be effectively controlled with the help of Activity-based Costing (ABC) rather than traditional costing.

A firm with uncomplicated operations or a firm which is into trading will have almost all the expenses, which can be traced to products produced or services created. Increase in the size of operation, increased number of items, complicated processes, extensive distribution network and long-term research and development support to manufacturing add complication in operations. Increasing complexity of operations bring drastic changes in the size of overheads spent on support facilities. Tracing expenses of products or services with the help of the traditional costing system becomes complex and expensive. Hence, managers all around the world are showing an increasing interest in Activity-based Costing (ABC)

A survey of the US based companies reports that 18% of the businesses interviewed were using ABC, 20% were considering adoption, 15% rejected ABC after an assessment and 47% did not consider adopting ABC at all (Innes et al., 2000).

A survey of the UK based companies conducted by the Cost Management Group of the Institute of Management Accountants (Krumwiede, 1998a) revealed that 49% of the businesses interviewed had adopted ABC, including 45% of the manufacturing firms.

The Accounting World Magazine, Activity-based Costing, Globalization, Multinational Companies, Indian Markets, Foreign Organizations, Cost Management Group, Industrial Production, Human Resources, Traditional Costing Systems, Financial Accounting System.