The Activity Based Cost Model Essay

The Activity Based Cost Model Essay

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The activity-based cost model (ABC) is kind of method that calculate company’s cost by allocate different activities and verify each cost pools of company. In recent years, ABC model has be used largely by many organisations, some managers believe that ABC model can bring more benefit rather than traditional cost and provide better support for managing organisation. However, some people doubt that ABC model also has limitation and cost to company, and it may not suitable for all types of organisation.
1.1 The benefit of ABC model
According to Swenson (1995), activity-based cost model has been accepted by more and more manufacture organisation and they provide many positive feedback about ABC model. In change of satisfaction, almost all respondents reported that managers were satisfied with improvement of their cost management system by ABC model, the most improvement is the product costing and cost control efforts, it can effectively increase efficiency and help managers well. Activity-based cost also can help managers to improve their decision making. Some manger present that activity-based cost can improve the accuracy of product cost information and support manager to do strategic decision. On sourcing decision, 24 percent of sample firms for product sourcing decisions and they are large producers for expensive durable goods and they usually ABC model to decide whether to produce the component part or use an outside supplier. This because for large industry, the accurate product information is critical to sourcing decisions for after-market part. 72 percent of sample firms use BC model to support pricing and product mix decision. Through ABC model the plant can submit bids that below actual cost for low volume product, and it ...


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...inancial operations of an organisations, it is accepted by many types of organisations. Because of that most ABC firms has to prepare two costing systems and two accounting books, which means company has to spend extra resource for costing management. Moreover, as for estimate different type of cost, accountant need to create many cost pools, as the result the whole system become too complex and hard to calculate the total costs. For service organisation such as hospital, the activity-based cost model is inefficient because each patients has different cost, even using the average number of cost the organisation also may have cost leaks. According to research by Mohammad (1998), there nearly 33.1% expenditure savings from using proposed aesthetic, however this result doesn’t count joint and indivisible provision, epically sometimes nurses can take care more patients.

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