Suitability of cost drivers in ABC in terms of 1) predicting future costs and 2) controlling and managing costs
- Predicting future costs: The activity drivers used will allow it to predict the future costs of its products by monitoring costs and quantities for each product.
- Therefore, it will be able to budget for these costs going forward.
- It will also give insight into the differential costs associated with producing its products and this may be used as for setting prices or quoting the cost of jobs to clients
- Controlling and managing costs: the ABC system may also be instrumental in controlling and managing costs as it will give an insight into various activities (and hence costs) associated with producing each product.
- Therefore, managers will be able to use this info to fine tune the production process to achieve potential cost savings.
- To further control and manage costs, should consider using root-cause cost drivers that will identify the underlying cause of activity costs (which may be potentially different to activity drivers used to predict cost)