Page 116 - MA - May 2017

FROM THE RESEARCH DESK

Role of CMAs
in

Activity Based Costing & its Applications

Assisting in Designing and ImplementingActivity Based to provide real time cost accounting information to all relevant
Costing (ABC) System: providers, payers and managers with decision support alerts is
Designing and implementing a good Activity Based Costing system essential to actively manage costs when it can do measurable good.
requires intimate knowledge of many parts of the organization’s CMAs can apply Time-driven, Activity-Based Costing here to provide
overall operations. This knowledge can only come from the people who high quality but reasonable cost care.
are familiar with those operations. Here CMAs can act as a consultant
to facilitate the management in developing effective framework of Applicability of ABC method in the IT Sector:
Activity Based Costing (ABC) System in the organization. They can With the proliferation of computer-related services, the explosion
also help to identify the appropriate methodologies to ensure the in data communication, and ongoing trends toward globalization,
sustainability of an ABC system helping to realize the informational managers in high-tech industries are considering new ways to manage
needs of its users. and control costs. The fact that most Information Technology (IT)
services have varied degrees of intangibility creates constraint to
Customer Profitability Analysis: measure the costs of the services delivered. The resulting model
Customer Profitability Analysis has become an important new provides a managerial tool to compute productivity and efficiency
management accounting tool based on recognition that each and is currently being used for IT cost chargeback and process
customer is different and that each amount of revenue does not improvements. The costs of IT services could be more accurately and
contribute equally to the firm’s profitability. Customers utilize meaningfully charged to the clients/users under ABC method. The
company resources differently; thus customer costs vary from professionals like CMAs can help managers assess which activities
one customer to another. At this juncture, CMAs can apply ABC could be reduced or eliminated.
technique to assist manager in identifying customer activities and
track those costs that are allocated to specific customers. This can ABC Method for sustainable infrastructure:
provide management with unique information about customers and Infrastructure is the backbone of acceleration of growth in India.
customer segments. It would also facilitate in protecting existing In a populous country like ours with increasingly growing levels
highly profitable customers; price-fixation of expensive services of consumption and industrialization, prompt development of
based on cost-to-serve; discounting to gain business with low cost- infrastructure such as Railways, Power, Ports, Highways, Economic
to-serve customers and attempting to capture high-profit customers Zones, Smart Cities among others, is not just a need of an hour but
from competitors. a pre-requisite for growth and sustainability. Thus to achieve higher
productivity and profitability with optimum duration and optimum
Service Sector: cost, application of ABC is unparallel. ABC can contribute to evaluate
The role of service sector’s contribution in Indian economy is the cost and performance efficiency of companies in a more exact
gradually mounting up over the last two decades. The CMAs can way. It makes the management practices more transparent, too.
help out management in the decision making purpose regarding
Price-fixing mechanism, Break-even analysis, Productivity and Project Cost Analysis:
Profitability. The CMAs can apply ABC as a tool for determining Many business improvement projects may need considerable
true costs in the service sector and help companies to outline better capital expenditure, and it will be indispensable therefore to do a
decisions or strategies based on more accurate costing information. cost benefit analysis to establish whether it is worthwhile going
ABC can allocate activity costs to service, or customer that consumes ahead. In this juncture, CMAs can apply Activity Based Management
resources in order to compute profitability and provide cost-effective (ABM) to supply more accurate information about the potential
and timely information better than traditional accounting system. savings from a particular project, therefore leading to a more accurate
assessment. After completion of a business process improvement
Applicability of ABC method in the Health Sector: project, many businesses do not measure the benefits achieved by
One of the decisive challenges of healthcare profession is to the project, and in some cases fail to take full advantage of them.
measure actual costs in real time. All payers like the Centers for ABM enables management to identify which activities or processes it
Medicare & Medicaid Services, employers, consumers/patients, etc. is spending the most on, and where the biggest financial savings can
are willing to pay for healthcare services based upon real costs with be made. It can also identify activities where management believes
a reasonable margin. Obviously, having clinical/business analytics big improvements can be made.

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