1.7 The implications of switching to ABC

　　The use of ABC has potentially significant commercial implications:

　　§ Pricing can be based on more realistic costs data.

　　- The traditional method of absorption of overheads into unit costs on a volume basis may be misleading, with the result that product costs can, potentially, be materially under/overstated.

　　- Thus, where cost plus pricing is in use, products that have been materially under-costed may be priced at levels that generate a loss whilst products that have been materially over-costed many be priced at levels that are uncompetitive.

　　§ Sales strategy can be more soundly based.

　　- More realistic product costs as a result of the use of ABC may enable sales staff to:

　　- target customers that appeared unprofitable using absorption costing but may be profitable under ABC

　　- stop targeting customers or market segments that are now shown to offer low or negative sales margins.

　　- Front line sales staff will be able to negotiate prices with greater confidence

　　- ABC can be used to review the profitability of products and services with a view to focussing the efforts of sales staff upon those products and services which offer the highest sales margins.

　　§ Performance management and decision making can be improved

　　- Research, production and sales effort can be directed towards those products and services which ABC has identified as offering the highest sales margins.

　　- ABC can influence decisions as to which:

　　- new products/services to develop

　　- existing products/services to curtail or drop

　　- products/services should be promoted

　　- overhead costs to target.

　　Test your understanding

　　Identify for a hospital x-ray department possible cost drivers for the following activities:

　　§ equipment preparation

　　§ patient preparation

　　§ patient aftercare

　　§ film processing

　　§ film reporting