Activity Based Costing system a viable instrument for small and medium

Activity Based Costing system a viable instrument for small and medium 

Sri Lankan Context

Similar to Developing countries, business framework of Sri Lanka is composed of SMEs. SMEs are the main contributors to the economy in Sri Lanka.

What could be the reasons behind the low level of adoption of ABC in Sri Lanka? In my view, one reason is that Sri Lankan people always resist change initially. We are brought up in this culture where we follow the norms and traditions. There is a general reluctance when new ideas or methods are proposed. Like in this case, our accounting has been based on traditional systems. Most of the organisations practice traditional costing. They do not want to change it. People managing costs and accounting in Sri Lankan firms are hesitant to initiate these new techniques like ABC.

Complexity in adopting ABC is one other major reason why it is not widely practiced. Defining various activities in a process, identifying their cost drivers, determining the resource allocation per product becomes cumbersome when the process in study is complicated or lengthy. Add to that, if the firm produces variety of products and each one has a very detailed process, ABC implementation becomes a very tedious task. Before ABC is to be implemented, the whole organization has to be geared up for it. Even the lowest level employee involved in the process should contribute by keeping record of either the labour hours, machine hours, amount of goods handled etc. so activity allocation is possible. If this type of activity measurement is not done ABC implementation is not easy, since the accounting or costing department cannot solely do it on their own.

In my opinion, accounting departments of organisations should take a more proactive and practical approach to implementing ABC in Sri Lanka. Government organisations like Ceylon Oxygen, Petroleum corporation, Pellawatta sugar can get the help of accounting and costing experts to adopt ABC at their organisations. Talking about the textile industry, Sri Lankan apparels always had a high value in international markets with their outstanding quality at cheaper prices. Multitude of skilled labour at low costs paved the way for this. However, countries like Bangladesh and Vietnam are gradually becoming major threats to this industry. If Sri Lankan apparel companies can adopt ABC costing, they might be able to cut down on the wrong overhead allocations and become more competitive in terms of pricing strategy.

Implementation of ABC results in more in-depth analysis of the process. Each and every activity related to providing a good or a service has to be identified and costs allocated for each. This could lead to identification of unnecessary processes, repetitive activities, improper movement or handling of goods that could ultimately lead to longer cycle times, higher costs etc. Hence ABC infact could be used as a lean manufacturing tool.