Activity-based costing as a tool for gaining competitive advantage: a case study

In today's competitive market, raising the prices or functionally executed cost cutting may not be a good option, as this may lead to reduction of market share or a risk of deteriorating the service quality, respectively. Another better prospect is to abandon unprofitable products, service lines, channel or customers, but these actions first require the ability to properly and accurately measure cost to determine true profit margins. Measuring the revenues is not a problem, but measuring the cost is. Traditional costing systems tend to distort product costs and lead to poor strategic decision making. Activity-Based Costing (ABC) is designed to deal with these limitations associated with traditional cost reporting systems. This paper presents findings of a longitudinal study, carried out in a leading automotive filter-manufacturing unit in India, where the concepts of ABC were utilised. The study was carried out at the works of the vendors supplying components. The result obtained reflects that the existing system is not uniform and no systematic method has been adopted in arriving at the different rates.