It has been suggested that IT and ABC have to go hand in hand, and it is unwise to separate these two components in an effort to analyze their individual contribution in developing more efficient process of production . IT is not the driving force behind ABC. Both forces are equal in magnitude in terms of driving each other. To give different attention of IT and ABC is necessary to reduce the level of complexity and the mistake of budget allocation for each activities. The communicative attribute of IT will be dealt with namely, the infrastructure network and the software of ABC and management information system as the main facilitator of business process information communication. Both is tied to corporate strategy. A corporation having a strategy to get benefit of it would have the opportunity to increase its market share, economy of scale, and return on assets. In a competitive environment, a company would want all the advantages it can obtain to ensure business survival and success.
Simplification and Technological Innovation.
The significant drivers of strategic change include simplification of procedure and technological innovation. The need to capture economies of scale and scope leads to the goal of corporation. However, corporations must do this more efficiently and effectively than their competitors, and thus strive to utilize tools that give them that competitive edge. This brings on the demand and investment into IT and ABC, so that it can aid in achieving proficiency and efficiency. Transnational firms should rely heavily on ABC and technological innovation to enhance their capabilities to respond to the more fierce global competition. Strategies of corporations will now have to be able to respond to threats and opportunities brought on by the new business paradigm. Investments in IT, unlike before, are becoming more necessity to take into account of management decision making. It will create more competitive advantages for longterm because of the high rate of innovation that IT now allows. However, this means that corporations must continuously commit and innovate in IT in order to remain competitive.
Knowledge, skills, financing and marketing, all of these components will increasingly come from sources all over the world to match the new industry requirements to develop customize demand in more severe situation. This potential and the increased global competition leads management to use different policy towards a low cost company. They have to pay more attention in managing activities, eliminating uneccesary waste and enhancing value-added. This policy will give more accurate costing and higher profit results throughout redesigning of products processes for least cost and time performance. Previously, it requires management to understand better the relationship between transactions and overhead costs, as well the relationship between costs and quality.
Activities Inventory ===>> Simplicity of Process and Procedures + Applied Information Technology (Reengineering) <<===>> Eliminate Unnecessary Activities (Flowchart Analysing or alike) ===>> Lower Expensive Resources + Higher Quality (TQM) ===>> Cheaper Price of Products/Services ===>> Better Position in Competition
ABC Concept.
The concept of activity based costing focus on activities because they consume resources and generate cost. ABC examines demands made by different products on indirect resources. This idea focus on expensive resources, resources whose consumption varies greatly by product, resources whose demand is not correlated with traditional volume-based allocation methods ( e.g. direct labor, machine hours, materials ). Usually product cost distortions occur in most companies producing and selling multiple products or services. It is necessary to consider pre-production, post production, selling and delivery expenses as product cost exclude only cost of excess or idle capacity and R&D for new products.
ABC can be adopted for strategic purposes, off-line from the official accounting system.
There are some remarkable advantages,
- provides more accurate information on product cost for decision making.
- Identifies $ cost benefits from simplifying design and processing of products, reducing activities (e.g. rework, inspection, etc.) establishing TQM/JIT improvements focus on activities instead of volume and standardization of parts.
ABC Process.
The ABC information may be used for strategic purposes includes product profitability and customer profitability. For performance measurement includes activity of process management and organization learning and process improvement. The focus on transactions types covers logistical transaction (movement of materials), balancing transactions (supplying materials, labor and capacity to meet demand), quality transactions (communicating specifications, quality engineering, control etc), change transactions (accommodating changes in designs, schedules, specifications, etc.).
It is important to know how to manage waste in operating activities. The steps are make flow chart of activities in the organization, then identify sources of customer value in every activity, afterwards identify causes of delay, excess and unevenness in all activities, and the last step is track and eliminate waste or non-value activity.
Source: Cooper and Kaplan.