The Best measure of a breakeven point is: BEP=Total Fixed Cost/Contribution and contribution is Sales Price Less Variable Cost. (Atrill and McLaney, 2017, P. 258). This information is great if we are certain about future performance of the business, but all businesses today deal with the uncertainty that nothing is sure. An organization does not know if all the products that they have manufactured will be sold in time, or that the cost of producing a product will remain the same always, especially when we are dealing with scarce resources (Atrill and McLAney, 2017; Navaneetha et. al, 2017; Barrett, 2004). Activity Based Costing Keeping in mind the short comings of CVP, It is suggested to use Activity Based Costing to align the costs and overheads of running the business, while taking away the guess work on cost attributing.
This is especially the case in multi-product organizations, ABC can help management in Key Account management, setting pricing strategies, and product strategies. (Barrett, 2004). Let us take a hotel for instance that has 10 A Grade service staff and 300 rooms with different values, can the 10 A grade staff service all 300 rooms, effectively? Or should they be deployed to service lower priced rooms? By analyzing the returns, management should be able to know the returns on investment from all the rooms, and as well the overall business a guest can bring to the hotel and based on that they can decide how to deploy the A Grade staff. The reports might show that, lower priced rooms can bring in more sales, but a single suite guest might spend more money in the hotel. My Question to you is, what do you think of Activity Based costing and do you think that it should be introduced to businesses?