Activity based costing (ABC) is a relative new way to allocate costs to specific processes and services. This system assures that the costs are accurately distributed to the products or services that generated them. ABC illustrates costs more accurately, giving management insight to the cost associated with certain business activities. ABC extends the decision-making skills of management by expanding on traditional costing (job order costing/process order costing) techniques. However, since ABC's introduction in the 1980's, many corporations are not using ABC, despite gained managerial decision making capabilities. Even by the mid-1990s, ABC's use has not spread throughout the accounting industry and its use is not obvious (Selto & Jasinski, 1996). The following article will discuss the pros and cons of the ABC method.
ABC is an extension of traditional product costing techniques. These techniques are called job order costing and process order costing. A job order costing system arranges costs for each unit as it goes through a production process. A process cost system collects costs in work in progress account. The numbers of units worked are recorded for the accounting period.
These systems alone do not accurately illustrate costs incurred. Instead, these two costing techniques generally lump costs into 3 main categories (cost centers). These three categories are direct materials, direct labor and overhead. Cost drivers are then assigned to represent the relationship between the cost and the process it is allocated to.
ABC provides a better map of the costs of manufacturing products or distributing services. ABC uses a multitude of activity centers, which are the equivalent to the previously mentioned traditional cost centers. Each of these activity centers has its own cost driver and driver rate. ABC identifies many different costs to products by adjusting the cost driver and driver rates to specific activity centers. This process avoids across the...
...In modern business environment, the use of traditional costing system is no longer relevance to the company to achieve competitive advantage. Nowadays, ActivityBasedCosting is considered as one of the effective tools to enhance the ability of the organisation to meet global competition. This had resulted in the change from traditional costing system to an increasingly popular costing system suchActivity-BasedCosting (ABC). ABC system has emerged as an alternative to traditional costing system to meet the need for accurate cost information about the products, services, customer and processes. ABC performs the arithmetic to provide accurate cost information while ActivityBased Management (ABM) is focused on using this information obtained from ABC to manage activities in order to improving business (Gunasekaran et al., 2000). Generally ABC systems enable indirect and support expenses onto each activity. Following by identify the cost drivers to measure the activity used by cost objects and allocate them to cost driver. In order word, ABC helps the manager to understand about the cost and expense in each production by giving managers a clearer picture of the economics of their operations to managerial decision making at a strategic level (Kaplan and Copper, 1998)....
...ActivityBasedCosting can be defined as an accounting methodology that assigns costs to activitiesbased on their use of resources, rather than products or services. This enables resources and other associated costs to be more accurately attributed to the products and the services which they use. It doesn’t change or eliminate any costs; it provides detailed information about how costs are consumed. (Online manager-net.com).
Traditional cost accounting looks at what is spent, while ABC methods look at what is done in terms of activities. In ABC it is much easier to identify opportunities to reduce costs and improve performance, while maintaining the quality of care provided.
Traditional Cost Systems use cost allocation methods, do not focus on where or why costs occur, Report information that is accounting oriented and inaccurate. These systems are also not easily understood by operational managers, since the focus is fiscal.
Whereas ActivityBasedCosting assigns costs to activitiesbased on the resources they consume. ABC provides insights into the sources of costs and the possible impact of different decisions. It also provides the information required to take action and realize performance breakthroughs.
Implementation of ActivityBasedCosting
In Most cases,...
The management of costs remains pertinent to the successful operation of any company. To achieve a competitive edge a company must consistently improve their service or product quality, lower their service or product costs, and eliminate services or products that incur profit losses. Using a traditional costing system the portion of overhead costs allocated to the production of a service or product is determined by the total of direct labor hours used in production of the service or product. Companies implement refined cost allocation systems such as the activitybasedcosting method with the intention of helping management strategically plan because these systems provide quality information to help management make informed decisions. In this essay, I will examine the use of cost allocations, the activitybasedcosting method, and how companies can implement and benefit from activitybasedcosting.
The allocation of costs serves four primary purposes throughout a company. The first is to present the information management needs to make an informed decision. The second is the reduction of non-essential uses of common company resources. The third is to encourage management to assess the efficiency of services provided internally. Finally, the fourth reason is the calculation of the “full...
...ActivityBasedCostingActivity-BasedCosting (ABC) was developed as a practical solution for problems
Associated with traditional cost management systems. In the early 1980’s many
Companies began to realize that their traditional accounting systems were
generating inaccurate costing information. Traditional cost accounting systems
that were designed to address the issues of inventory valuation for external
audiences have two deficiencies. The inability to accurately determine actual
total product and service costs and the inability to provide useful information to
management for purposes of making operating decisions.
Users of ABC
Businesses want to know which of their products and services make or lose
money so they can remain competitive. To get a handle on this information, some companies have embraced activity-basedcosting/management (abc/m) to help them tract product and customer profitability and reduce operating costs. armed with the facts from, the abc/m data, managers can make better decisions about how they can use resources and can improve business processes.
Activity-basedcosting is an accounting methodology that links the following
elements; costs, which are the expenditures are classified as product costs. That resources are costs that are...
Instructor Bradley Johnson
December 17, 2012
In business, there are two separate costing methods that a firm can use. One of those methods is called traditional costing system and the other is activity-basedcosting. Activity-basedcosting (ABC) is a costing method that focuses on identifying activities which allocates the costs of each activity a firm uses. From our text, it identifies Activity-basedCosting as “a two-stage product costing method that assigns costs first to activities and then to the products based on each product’s use of activities” (Lanen, 2011, p. 329). A firm employing such a system provides a better understanding of the goods and services that it uses. Developing such a system in a firm comes from proper planning. When developing a firm, it is effective to follow certain steps to identify the process to attain the goals the firm has set. At times, many firms set certain examples by the managers to help understand the direction in which the firm is heading to become more effective. Activity-basedcosting is not only...
... * Activity-BasedCosting (Encyclopedia of Management)
* Activity-BasedCosting (Encyclopedia of Small Business)
Activity-basedcosting (ABC) is an accounting method that allows businesses to gather data about their operating costs. Costs are assigned to specific activitiesuch as planning, engineering, or manufacturingnd then the activities are associated with different products or services. In this way, the ABC method enables a business to decide which products, services, and resources are increasing their profitability, and which are contributing to losses. Managers are then able to generate data to create a better budget and gain a greater overall understanding of the expenses that are required to keep the company running smoothly. Generally, activity-basedcosting is most effective when used over a long period of time, as opposed to shorter-term solutions such as the theory of constraints (TOC).
Activity-basedcosting first gained notoriety in the early 1980s. It emerged as a logical alternative to traditional cost management systems that tended to produce insufficient results when it came to allocating costs. Harvard Business...
...In the article written by David M.Katz on Activity-basedCosting (ABC), it is agreeable that ABC has lost ground in the metric wars in recent years but it may be set for resurgence. Why? Firstly, let’s back date to the time when ABC arises in the world of accounting. In the early 1980s, ABC was introduced to overcome the growing dissatisfaction with the traditional ways of allocating costs. The problem with traditional costing method is it only assigns manufacturing costs to products - this includes direct material, direct labor and manufacturing overheads but it doesn’t allocate the indirect and support costs . While manufacturing costs may be significant, there are many costs that relate to other facets of the business, including research and design, marketing, distribution and customer service. In today environment, direct labor now represents small fraction of corporate cost, while expenses covering factory support operations, marketing, distribution, engineering and other overhead functions have exploded . Therefore, it is no longer justifiable to rely on the traditional allocation method which the product cost would not be accurate and eventually mislead the decision-making process.
To illustrate, company nowadays no longer mass-produced their products but also started to customize their products to meet markets’ demands therefore, the traditional standard cost systems no longer reflects the economic...
...Activity-BasedCostingActivity-BasedCostingActivitybasedcosting (ABC) is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity. Activitybasedcosting is a subset of activity-based management. Activitybasedcosting is used to determine product costs and for internal decision-making and for managing activities. Traditional Absorption costing is for external financial reporting.
Activity-basedcosting is a suitable and appropriate method for companies with multiple products or services who are having problem of inaccurate costing information and need to know which products are really profitable and which are the one that is making loss. For these companies the effort required to successfully implement activitybasedcosting is worth the time and resources. Activitybasedcosting can identify high overhead costs per unit and find ways to reduce the costs, avoid decreases in head counts due to inaccurate allocation of costs, and measure profitability with higher...