Activity-Based Costing in Indian Manufacturing

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Table of Contents

Overview of the Companies and the Issues Discussed
SWOT Analysis
Key Issues
Alternative Strategies
References

Overview of the Companies and the Issues Discussed

The study focused on manufacturing industries based in Allahabad city in India and examined their responsiveness regarding the concept of activity-based cost (ABC) system. From the study, the issue discussed is the contribution of the ABC system on decision-making, costing, employment, training, and competitiveness of companies. The study reviews the relevance of the ABC system in companies and the need for managers in enterprises to adopt it in their operations. It is evident from the study that ABC is beneficial for companies, a factor that is also practical from the research (Salem & Mazhar, 2014). Besides evaluating the benefits of the system, the study also related to its challenges. The study also gives a holistic overview of the ABC system and the role it plays in advancing the position of enterprises among competitors.

SWOT Analysis

Strengths and Weaknesses

In modern times, manufacturing companies have a number of strengths that they can harness to outsmart the rising competition. The strengths comprise the availability of labor, technology, and political stability. In India for instance, there is a high number of skilled labor, raw materials, and a majority of companies are stable. Fundamentally, the availability of skilled labor in India has not only improved the scale of production in manufacturing companies but has also enabled the industry to standardize production costs. As such, a number of overhead costs incurred from poorly utilized factors of production have become minimal. Over recent decades, India has enjoyed a peaceful and stabilizing democracy, which is among the strengths enjoyed by the manufacturing companies in cities such as Allahabad.

Although the manufacturing sector of India enjoys strengths linked to its rising economy and technological advancements, there is a number of weaknesses that the sector experiences. Limited expertise among human resources, poor adoption of technology, and little room for expansion are some of the main weaknesses demonstrated by the manufacturing industries in India. While the country boasts to have high numbers of labor, most of them have limited expertise in various fields of production. The implication of limited expertise is an inadequacy of human resources who can provide directions concerning high-end production. Moreover, due to the limited expertise and the fact that the country is one of the developing economies, the utilization of modern technologies is still low.

Therefore, many industries in the country do not enjoy the gains advanced by mechanization as evidenced by various economies in Europe, parts of Asia, and in the United States. Another weakness that hampers the productivity of manufacturing industries in India is the limited room for expansion. It is important to note that the weakness is not exclusive to companies in India, but also affects companies across the globe. The infrastructure built and used in production processes is not flexible and in case of a shift in the market, the firms may have to undertake expensive and time-consuming adjustments.

Opportunities and Threats

India’s growing economy, availability of resources, and technology are among the opportunities that are useful in improving the quality of products delivered by its manufacturing industries. The growing economy of the country is gradually attracting investors from several parts of the world. Furthermore, the country has vast amounts of resources that companies can utilize in order to reduce the cost of production. While some companies in the world grapple with problems triggered by the scarcity of resources, the manufacturing sector of India has opportunities, which if utilized optimally, can improve the quality of its products.

Production cost and competition in India are some of the threats that place manufacturing industries at a disadvantage. While India has a high number of human resources, the cost of transport and power required by processing plants is higher as compared to those in other Asian and European countries. Moreover, enterprises also suffer from competition advanced by domestic and foreign companies. The level of competition makes firms incur losses because of the price cuts introduced to win the customers in a competitive environment.

Key Issues

The key issues evident from the study comprise the high cost of production incurred by manufacturing companies and poor decision-making process introduced by traditional costing methods. From the study, firms in India have experienced problems in ascertaining the actual cost of products, a scenario that compels most of them to speculate prices. Salem and Mazhar (2014) highlight that price speculation implies that companies can incur losses or fail to match the prevailing conditions in the market. Consequently, due to the application of poor costing methods, decision-making processes among managers in firms across the country are complex especially in areas like employment, pricing, and the establishment of overhead costs. The aforementioned key issues led to the study’s advocacy for the adoption of the ABC system.

Alternative Strategies

ABC system is useful in ascertaining the production costs incurred by manufacturing companies in India. The gains accrued from the system outweigh its demerits, a phenomenon that substantiates its relevance. The alternatives that can address the problems witnessed in the gradual adoption of the system comprise awareness creation by the government and concerned stakeholders. The reluctance demonstrated by managers in several industries in the country is an outcome of little information that they have concerning the practicability of the system. However, by creating awareness, managers in manufacturing industries will slowly begin applying the system in their activities.

References

Salem, S., & Mazhar, H. (2014). The Benefits of the Application of Activity Based Cost System -Field Study on Manufacturing Companies Operating In Allahabad City – India. IOSR Journal of Business and Management, 16(11), 39-45.

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