This document discusses activity-based costing (ABC) and its benefits for supply chain management and cost optimization. ABC involves allocating costs based on the activities consuming resources, allowing organizations to understand cost drivers. It provides advantages like cost reduction through examining resource utilization and customer/product profitability. ABC also supports cost allocation to customers/products and internal benchmarking. While ABC provides insights, it also faces challenges like needing extensive data and complexity, issues with cost allocation, and customers changing impacting others.

1. October 9, 2021
SUPPLY CHAIN MANAGEMENT
Submitted by: Awais Iqbal
2019-EMBA-08
Submitted to: Dr. Fatima Gillani
Date: October 9, 2021
ASSIGNMENT NO. 1
Summary Of Activity Based Costing (ABC)
In Logistics & Supply Chain Management
As Cost Optimization & It’s Benefits

2. Supply Chain Management Assignment No. 1
Cost Optimization
Cost optimization is an important characteristic of supply chain management because
it is vital for every stake holder involved in supply chain to get the maximum benefit of
reduced cost. It also enables customers to enjoy the maximum benefits of reduced
cost which results in generating maximum revenue out of all inputs, processes and its
output of a company.
Cost optimization is an important tool for decision makers who strive for maximization
of growth and reduction of cost. Cost optimization always help decision makers to set
best prices of a product or service after optimizing allocated resources to offer it in
market to attract customers which ensures value maximation in the best interest of
their company or brand.
It can also provide a distinct advantage over competitors in the market who may
choose to lower the quality of a product or service to reduce the cost incurred in
manufacturing a product or rendering a service.
Standardization and consistency are also an important factor of quality in making a
product or rendering a service which can be obtained with the help of cost optimization
which leads towards maximization of growth, profit and options for better
collaborations and diversification in the market also.
Activity Based Costing in Logistics & Supply Chain
Activity-based management (ABM) is cost management based on the information out
of ABC. This can be to improve efficiency and reduce cost via for example value chain
study and reengineering but also investigation of customer/product profitability.
It can sub grouped into following two major components;
1. Cost allocation handles the process of allocating cost of a department/organization
to a certain customer and/or product. The outcome of activity-based costing can be

3. Supply Chain Management Assignment No. 1
used to determine the allocation. ABC is typically used to influence customer behavior
and to assign cost as fair as possible
2. Another method of activity-based management is cost reduction and analysis for
which the outcome of the activity-based costing can be used as well. In this group the
objective of using ABC is mainly to influence behavior within the department/business
itself.
Advantages
(i) Cost reduction and analysis
An important feature of activity-based costing is providing information to decision
makers which is based on following;
• Gain knowledge on resource utilization
• Examine customer/product profitability
• Raise in- and external understanding of departmental cost drivers
• What-if analysis
• Support customer cost reduction
• Internal benchmarking
(ii) Using activity-based costing for cost allocation
When a department is considered a cost center it can be decided to allocate the cost
of the facility/department to the (internal) customers or products.
Disadvantages
a) Data availability and level of complexity
b) Cost allocation issue e.g. fixed/indirect, change of order volume (over and
under coverage).
c) Customer changes impacting other customers
d) Impact of direct, indirect, variable cost, cost elasticity