ACC 310: Cost Accounting
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-based costing. Activity-based costing (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-based Costing 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-based costing is not only an effective way to run a business but as the individuals involved in the business become more aware of how to use this type of method, activity-based costing then becomes a strategic method in which a business could then make future developing ideas in which the company can expand. Activity-based Costing (ABC) is a costing method that focuses on identifying activities then allocates the cost of specific activities the firm carries out. This method of costing confirms that the costs are accurately distributed to the products or services that allocate them. ABC demonstrates costs more effectively, making it relevant for management to improve on decisions associated with certain activities. When the ABC method is utilized in a firm, it extends the decision-making abilities of management by broadening on traditional costing techniques. According to The International Journal of Educational Management, it stated that “Activity based costing provides a technique that allows for a more accurate cost determination than that of traditional systems when dealing with multiple product lines” (Simmons, Wright, & Jones, 2006). There are more benefits using the ABC method than a traditional costing system. One of the benefits that an ABC method has is that this type of method is more accurate than a traditional costing method. The reason it is more accurate is because the ABC method uses a separate assign rate for each activity. For example, when a company has multiple assigned jobs, it is better for a company to use an ABC method because it will show the exact cost of each activity. This is a benefit because when it comes to effectively planning the order in which the business will be ran the owners can look at the assigned categories and determine which order will produce the most effective manor in completing each job. This method also is a benefit when it comes to determining how much profit per job each particular activity will produce. This method is better than traditional method because in the traditional method somewhat adds everything into one lump sum then divides it by a single rate. This not only does not allow the business to look at individual activities but also misleads the company to believe that each activity is equal in profit margin. Many companies use the ABC method because it has advantages over traditional method. When a firm employs an ABC system, it provides a better understanding of the cost of goods or services that it uses. As stated by The Journal of Bank Cost & Management According, it says “By employing activity-based costing, a financial institution can gain greater understanding about the costs associated with a product or service and be assured that the overhead costs are being allocated properly” (Raihall & Hrechak, 1994). This system allows businesses...
...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...
...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...
Definition and concept
‘An approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs. Resources are assigned to activities, and activities to cost objects based on consumption estimates. The latter utilise cost drivers to attach activity costs to outputs.’Activity-basedcosting (ABC) is a costing methodology that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each. This model assigns more indirect costs(overhead) into direct costs compared to conventional costing.
CIMA Official Terminology, 2005
A development of the principles of activitybasedcosting (ABC) is activitybased management (ABM).
Operational ABM is defined as:
‘Actions, based on activity driver analysis, that increase efficiency, lower costs and/or improve asset utilisation.’
CIMA Official Terminology, 2005
Strategic ABM is defined as:‘Actions, based on activitybased cost analysis, that aim to change the demand for...
DEVELOPING AND PROMOTING STRATEGY
Activity-based Management – An Overview
IN THIS BRIEFING… ctivity-based management and activity-basedcosting (ABM/ABC) have brought about radical change in cost management systems. ABM has grown largely out of the work of the Texas-based Consortium for Advanced Manufacturing-International (CAM-I). No longer is ABM’s applicability limited to manufacturing organisations. The principles and philosophies of activity-based thinking apply equally to service companies, government agencies and process industries. The acronym itself has evolved from ABC to ABCM (activity-based cost management) to ABM, and the application of ABC evolved from a manufacturing product costing orientation to a management philosophy of activity management applied in industries and organisations other than manufacturing.
Part 1 General FAQs
Part 2 Practical guidance on implementing ABM
ctivity-basedcosting and activity-based management have been around for more than fifteen years. Most forward-thinking companies have implemented them, or are in the process of doing so.
A A A
Part 3 Checklist
Part 4 Further reading and bibliography
BC is not a method of...
...Strategic Management Accounting
Workshop Activity Pack (Term 1 2012/13)
Prepared by Mike Barker, Module Leader.
Introduction to APC 309 Strategic Management Accounting.
Firstly, welcome to the APC 309 Strategic Management Accounting Module. Our team hopes you find the module interesting, challenging, and stimulating and would actively promote that all students participate within all workshops, and ask any relevant questions when necessary.
XYZ Plc. is a large multinational corporation comprising of a variety of different companies, operating within a number of different industries. The business has been operating relatively successfully, but due to the recent resignation of a Senior Management Accountant, a number of management accounting issues have subsequently been neglected. The senior directors of XYZ Plc. want to rectify this issue as soon as possible to ensure the management accounting function is operating correctly and efficiently. The directors have prepared a report (this workshop activity pack) highlighting nine key areas of concern within the business that need to be addressed with immediate effect. Over the following 9 weeks a number of case studies, reports, and questions will be analysed and investigated, to gain further understanding of the key concerns of the directors associated with the Strategic Management Accounting function of XYZ Plc.
Over the next 9 weeks there may be some additional...
... 1 Spring 1993
Target Costing at Toyota
Activity-BasedCosting in Cellular Manufacturing Systems
Controlling Quality on a Multidimensional Level
The Effect of JIT on Management Accounting
Activity-Based Total Quality Management at American
From the Editors / Barry J. Brinker
Cost Management Practice / Steven C. Schnoebelen
The Factory in Transition / Arun Maira
Reprinted with permission from The Journal of Cost Management, Volume 7, Number: 1 c1993
Research Institute of America, Inc., Warren Gorham Lamont Professional Publishing Division,
210 South St., Boston, MA 02111. All rights reserved.
Activity-Based Total Quality
Management at American Express
David A. Carlson and S. Mark Young
Product costing and a quality strategy are related in
the sense that both seek answers to difficult questions of how and where information workers spend
their time. This article illustrates how activity-basedcosting contributes not only to the achievement of
accurate product costs, but also to improved quality
at American Express Integrated Payment Systems
(IPS). Activity costs at IPS were determined by
asking each manager to estimate the time that his
department spends on each activity, then splitting
those activity estimates across each...
...Differences between Activity-BasedCosting and Traditional Cost Strategy
Activity-basedcosting (ABC) is a costing model that identifies overhead activities in an organization and assigns the cost of each activity resource to all products and services according to the actual consumption, while traditional costing equally distributes all overhead expenses. Thus, an organization employing ABC, can precisely estimate the cost of its individual products and services for the purposes of identifying and eliminating those which are unprofitable and lowering the prices of those which are overpriced. ABC is generally used as a tool for understanding product and customer cost and profitability. As such, ABC has mainly been used to support strategic decisions such as pricing, outsourcing and identification and measurement of process improvement initiatives. Due to its nature, traditional costing gives less freedom in that respect.
In the past, accountants divided all costs into variable costs and fixed costs based on the relationship between the cost and output (business volume) changes, where only the short-term costs that vary with the cost of production were viewed as variable costs. However, although short-term costs do not necessarily change with the yields, they will change in a period of time with the product...
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...