Applications and Relevance of Activity Based Costing

Abstract

As students of commerce, we have been dealing with the costing systems and their application in India. The domain knowledge of Costing Systems will help us gain insight into practices of Indian corporate sector for measuring and reporting performance of cost accounting. Despite of advancement in information technology and decision support systems, Indian firms predominantly use traditional costing systems like Absorption Costing and Standard Costing for performance management. This has resulted into inaccurate reporting of costs to management and thereby has resulted in lacunas in managerial control especially with respect to financial aspects. As an alternative, modern costing techniques such as 'Activity Based Costing (ABC)' provide a definite solution to this problem of inaccurate cost management. ABC has been successfully adopted by many multinational companies across the world. Unfortunately in last 20 years there has been a very slow progress in adoption of ABC in India. The rationale of this study is to identify financial performance and justification to adoption of ABC. This research will explore areas of concerns for Indian firms in their approach towards ABC as an organizational performance management tool. The significance of the study can be stated as it will bring out prospects, issues, performance and problems of adopting ABC in Indian context. This should help us in gaining knowledge about key factors that decide success of new costing system and the contributions it can make to the value of the company.