How ABC systems assist in cost management decisions by improving product design, processes and efficiency?
Answers
I assume you mean Activity-Based Costing.
The purpose of ABC is to allocate the fixed production cost in a way that you understand how much the "interruption of a single process" in the production flow of product costs.
Example: Company manufactures 1000 black cars at $ 4 K variable cost. per unit.
The production line stops because the color of the cars is changed to red.
The cost of the "cleaning, reloading, and retooling" of the color-changing process costs $ 1K
The company continues to manufacture 50 red cars at $ 4 K variable cost per unit
1K of overhead cost for color change divided by 50 cars = $ 0.02 per unit.
The total variable production cost of red cars $ $ 4.02 K per unit
This information provides you with the necessary tools to calculate the effect of producing "standard products' that allow you to run the production line 24/7 without interruption versus any variations that interrupt the product flow and end up costing a multiple of the "actual cost" of that particular item you add to the car.