Activity Based Costing
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Upon searching the Internet for an example of Activity-Based Costing (ABC), I found that the United States Postal Service (USPS) is among the companies that have implemented ABC over years to minimize costs and maximize productivity. ABC focuses on enhancing cost accuracy as means of creating competitive advantage. Production processes comprehend series of activities, each of which can be viewed as an independent part of the whole process. Traditional accounting does not focus on individual activities but on the entire process instead. Decreased cost accuracy can result in costs being overstated and/or understated for each activity involved in a particular production process.
The USPS, in an attempt to become more competitive, became interested in finding a costing system that would allow it to benchmark performance among its mail processing facilities across the country. In other words, the USPS became interested in enhancing cost accuracy in order to identify which plants, and, specifically, which production activities were inefficient. Initially, the ABC system implemented under the Postmaster General’s directive “used 58 work activities and nine cost objects” (Blocher, Stout, Cokins, & Chen, 2006). Through this system, the USPS was able to further minimize its costs, therefore, becoming more competitive: “in the initial application at a single mail-processing facility, there was a reduction of 13% in total cost as a result of the improved understanding of cost behavior in the facility” (Blocher, Stout, Cokins, & Chen, 2006). ABC was also applied to the system that the USPS has set to process customer payments; payments were made in cash, checks, or credit cards. The USPS determined after its ABC analysis that “the low-cost approach was to use credit cards” (Blocher, Stout, Cokins, & Chen, 2006). In the end, the USPS example illustrates how helpful ABC analysis can be while implementing a cost effective strategy that enhances competitiveness.