Question

What are three ways that activity based costing (ABC) can be used to reduce or mitigate business risk? Why isn't ABC used more often to do so?

Answer 1

Three ways in which ABC (activity based costing) can be used to reduce and/or mitigate business risk are:

(i): ABC enables better allocation of funds as business process intelligence is created. Besides ABC also leads to creation of cost data and this also enables better allocation of funds. Business risks are reduced when funds are allocated in an optimal manner.

(ii): ABC leads to generation of information and data and this becomes useful while quantifying the costs of a product or a service. This quantification of costs leads to reduced levels of business risks.

(iii): ABC helps in locating the causes of costs and then explaining the factors that drives the costs. This enables development of better cost control framework and hence reduces business risk.

The primary reason why ABC is not used more often to reduce and mitigate business risk is that the process often tends to be both tedious as well as expensive and the high costs involved eventually leads to costs outweighing the benefits.