Impact of Activity-Based Costing on Profitability: Evidence from Service Sector Firms in India

Abstract

In an increasingly competitive and volatile business environment, service sector organisations face mounting pressure to enhance cost efficiency and sustain profitability. Conventional costing systems often fail to generate reliable cost information in service settings because they rely on arbitrary allocation bases such as labour or machine hours, which inadequately capture the consumption of overhead resources. Activity-Based Costing (ABC) offers a more refined approach by assigning costs to activities that generate them, thereby improving the accuracy of cost measurement and managerial decision-making. This study examines the impact of ABC implementation on profitability in selected service sector companies in India. Adopting a mixed-method research design, the study draws on primary data collected through structured questionnaires administered to 100 management accountants and finance managers from IT services, healthcare, logistics, hospitality, and banking organisations. The findings reveal that firms using ABC achieve superior cost transparency, more informed pricing decisions, and greater operational efficiency, leading to improved profitability outcomes. The study also uncovers major implementation barriers, including high setup costs, resistance to organisational change, and difficulties in identifying and measuring activities. By demonstrating the strategic role of ABC in enhancing financial performance, this research extends existing literature on cost management systems and thereby offers practical insights for service organisations seeking to strengthen competitiveness in a service-driven economy.