1.7 The implications of switching to ABC
The use of ABC has potentially significant commercial implications:
§ Pricing can be based on more realistic costs data.
- The traditional method of absorption of overheads into unit costs on a volume basis may be misleading, with the result that product costs can, potentially, be materially under/overstated.
- Thus, where cost plus pricing is in use, products that have been materially under-costed may be priced at levels that generate a loss whilst products that have been materially over-costed many be priced at levels that are uncompetitive.
§ Sales strategy can be more soundly based.
- More realistic product costs as a result of the use of ABC may enable sales staff to:
- target customers that appeared unprofitable using absorption costing but may be profitable under ABC
- stop targeting customers or market segments that are now shown to offer low or negative sales margins.
- Front line sales staff will be able to negotiate prices with greater confidence
- ABC can be used to review the profitability of products and services with a view to focussing the efforts of sales staff upon those products and services which offer the highest sales margins.
§ Performance management and decision making can be improved
