Through the use of the prescribed format of the Activity-Based Budgeting, the managing can more easily cut down the budget in specific activities where it is shown that plenty of non-value adding activities are conducted. Officers preparing the budgets, using this kind of approach, cannot over-price some vague overhead costs for want of a bigger total budget figure, which would have meant more room for contingencies and more allowances for mistakes. Activity-Based Budgeting shows all the costs and in the end retains only those that are prudent and integral parts of the company’s operations.
4a. It is true that generating more accurate information through Activity-Based Costing (ABC) is not enough. Implementing Activity-Based Costing (ABC) should be a decision that everybody will stick to. This requires adequate understanding of Activity-Based Costing (ABC) and what its purposes are and why it has to take the place of the old Absorption Costing approach. The management should truly believe Activity-Based Costing (ABC) will improve the company’s system and ultimately the company’s operations, and all these should be reflected in the financial reports generated.
The management should authorize the proper orientation and training of everybody in the company regarding the Activity-Based Costing (ABC) system, its comparison with the old approach and the advantages it offers. Everybody should understand and should concur with the decision to switch to Activity-Based Costing (ABC). This is the only way to ensure that there will be no resistance to such change. It will be difficult to successfully undertake the transition if there are people in the organization who are against it.
These people can spread negativity and strengthen the opposition against the decision made by the management. Opposition, in this case, would not be in the form of vocal and openly expressed lack of cooperation. Instead, it will come in a destructive form – the management will be led to think the shift to Activity-Based Costing (ABC) will be smooth and uneventful, while the staff would be doing things to sabotage the use of the new approach. In the end, the original problem regarding incorrect financial reporting and incompetent accounting systems would not at all be solved.
Indeed, management will have to have effective change management measures in place during the transition phase from old approach to Activity-Based Costing (ABC). Management will have to watch out for factors that almost always cause changes for improvement within the organization to be unsuccessfully put in place. Poor communication between management and staff and the lack of adequate management skills among the managers are the major factors behind such failure.
Management should involve everybody in wanting Activity-Based Costing (ABC) to be adopted in lieu of the old approach. Group activities conducted to address possible setbacks – accounting people may be thinking that Activity-Based Costing (ABC) will make their work more difficult, production people may view its procedures as rather too inquisitive, and other similar scenarios – would help allay doubts and fears about it and will motivate them to contribute to its establishment in the company systems as the best approach for costing their activities and products.