Introduction Activity-based costing (ABC) is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” as well as variable costs. Activity-based costing is mostly used for internal decision making and managing activities while traditional costing method is used to provide data for external financial reports. Most organization uses activity-based costing as an addition system for using traditional absorption costing as sometimes the traditional cost system misleads the product’s profitability. In a company, there are many products on sale, if one product is sold at a high price with low product margin and a product with high product margin at a low price, it may result in a loss. In addition, due to the reason that cost drivers and enterprises business may change, activity-based costing analysis also needs to be revised periodically. This amendment should be prompted to change pricing, product, customer focus and market share strategy to improve corporate profitability. Importance factors that lead to successful implementation in activity-based costing Firms today are trying to introduce activity-based costing into their system, however, some firms are unsuccessful in the implementation, which later result in abandoning the ABC system. According to research, the reason of failure ABC implementation in People’s Bank of China is due to lack of a clear business purpose about the implementation, lack of education about ABC, poor ABC model design, lack of participants, individual and organizational resistance to change, and few outsourcers available. To solve these problems, top management support and cross-functional involvem... ... middle of paper ... ...ion Activity-based costing is used as a supplement of traditional cost accounting in a company to support manager in internal decision making. It focus on assigning the indirect cost to direct costs in order to get a more accurate cost on products. Activity-based costing uses several cost pools instead of one in traditional cost accounting. The system is easy to implement and it provides many benefits, it allows the company to respond to inefficiency by reallocating resources to more profitable activity from areas that absorb too many resources. It also allows the company to respond to manufacturing overhead cost and assumes a more accurate selling price on products in order to make more profits. Company that do not have internal expertise to conduct activity-based costing analysis may think to hire one or ask company that provides this kind of services for help.
Activity-based costing (ABC) is a costing method that is usually used as a supplement to a company’s usual costing system, and is therefore used for internal decision-making. It is designed to inform managers of costing information for decisions (strategic and others) that potentially affect capacity and consequently “fixed” as well as variable costs. In addition, ABC can also be used to pinpoint activities that would benefit from process improvements.
Roybal, H., Baxendale, S.J., and Gupta, M., (1999), “Using Activity-Based Costing and Theory of Constraints to Guide
An organization costing system is a system that helps the management with the strategy planning while the system plays an important role in providing accurate cost information about the products and customers (Curtin, 2006). UPS utilizes the Activity-Based Costing (ABC) system. ABC assumes that activities cause costs and that cost objects create the demand for activities (Marx, 2009). The key to cost allocation under ABC is to identify the activities that are performed to provide a particular service and then aggregate the costs of the activities (Gapenski, 2012). This is a marked departure from the practice of sharing overheads costs equally or overheads becoming part of the overall profit-loss estimate instead of component product pricing (Nayab, 2011).
Conventional Activity Based Costing (CABC) was first introduced by Robert Kaplan and Robin Cooper in the late 1980s through a series of papers published in the Harvard Business Review. The method aimed to correct deficiencies with the standard cost systems; the systems which attempted to cram all of a company’s costs into three broad categories – labor, materials, and overhead (Kaplan, 2007, p. 15). Such a system lacked the resiliency and versatile data management that was necessary to adapt to market demand changes that came with the twentieth century. While businesses improved to meet the market demands with services such as increased product variety, smaller order sizes, direct delivery, and specialized technical support, their traditional cost systems could not support efficient resource allocation for the rising costs to provide all those services. CABC sought to fix these issues. Cooper and Kaplan’s ABC system improved efficiency by assigning costs down to the product/orders level, enabling managers to better recognize where money was being wasted and where it needed to be invested. The basic model looked like this:
Patil, R. (2010, March 2). Activity Based Management: The ROI of an Activity Based Costing (ABC) project. Retrieved February 6, 2014, from http://activitybasedmgmt.blogspot.in/2010/03/roi-of-activity-based-costing-abc.html
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
Besides, an organisation can adopt a technique of activity-based costing (ABC) as an approach to support its sustainability objectives. ABC system is a technique of assigning overhead costs to products and services by identifying the cost drivers. ABC technique will first identify each activity cost that is involved in the process of production, then assign the cost to each product and service on the basis of each activity consumption in the production of each product and service (Drury, 2012, p. 253). ABC system is an effective method to account for costs of products and services. This is because ABC system allocates indirect costs based on a cause-and-effect relationship (Drury, 2012, p. 269). ABC system allocates overhead costs to cost
Activity Based Costing (ABC) addresses internal operating concerns and is an augmentation to the traditional cost management system. It is not a replacement for traditional accounting, but makes use of the source documents provided from standard job costing systems. ABC looks at a business unit’s events as cost drivers and assigns all company resources and accumulated costs against those events in a time-phased sequence. Revenue tracking provides management with a different point of view on the profitability of products and services, providing insight into pricing. Middle management and technical performing organizations are involved in the line item reporting provided within the ABC system, enabling management to achieve more responsibility of reported information throughout all levels of the organization. ABC is being ostensible by the accounting industry as the wave of the future and is gaining broad acceptance within larger organizations. This system is intended to provide performing entities and management alike.
Organisations have to incur costs to carry out their business and cost management is a part of business which helps the management to steer the company on the smooth road.In the article, an attempt has been made to explore the philosophy of cost and the ways to control it to stay competitive. Both quantitative and qualitative aspect of costs are important ,too much adherence to quantitative aspects might erode the benefits of qualitative aspect of the cost. Effective managers have the wisdom to recognize the qualitative aspect of the cost and it is a sine qua non of their strategies.
Cost accounting system has two types, job order costing, and process cost system. These two cost systems are very different, almost every company uses order costing or process costing. Starbucks, is a coffee shop where citizens congregate to drink there morning coffee, study, and or socialize. Starbucks is one of the oldest and largest privately held specialty coffee retailer in the United States. (Starbucks) Their passion is to discover the flavors you love and always bring it home, delivering the look, taste and aroma of the world’s best coffee and teas. Job order costing is a very easy way in order to help Starbucks managers to know how much profit their company (Starbucks) made.
Process costing System is an accounting expression which describes one method to determine the manufacturing costs to the units manufactured . Processing is typically used when similar units are mass produced. Also process costing system is a type of accounting process costing which is used to determine the cost of a produced inventory. Chartered Institute of Management Accountants (CIMA) defines process costing as " The costing method applicable where goods or services result from a sequence of continuous or repetitive operations or processes. Costs are average over the units produced during the period, being initially charged to the operation or process "( College Accounting Coach, 2007). Process costing is more important and appropriate for all businesses producing identical products during which production is an ongoing flow. Toyota is on the of the major companies in the world that used well-known new philosophic management to produce identical products using process costing system.
Generally Accepted Accounting Practice The main purpose of searching for a new method to estimate cost if due to the erroneous practices of accounting. There is a wide recognition of this problem but most companies still have not gone to a different approach. The GAAP principles do not provide the kind of cost detail and information focus required in today’s capital intensive, automated, and complex manufacturing and distribution. It generates an erroneous and inverse relationship between computed product cost and current production volume. This is the major problem- the inverse relationship between production volume and inventory value because these indirect expenses are all fully charges to the current product. In periods of declining sales, the apparent cost of the product rises, bringing suggestions of price increases in the face of weak sales performance. In good sales periods, apparent cost of product declines, suggesting either a lowering of prices or higher profits. Neither inventory valuation reflects the true cost of manufacturing the product. The typical distribution an accrual accounting practice often distorts operating cost information and performance criteria to accommodate financial policy, management practice, and current tax law requirements. Some manufacturers even overproduce to absorb overhead in the false assumption that this reduces their product cost. Many different methods have been tried to fix this inaccuracy, such as activity bases costing, machine labor costing, process costing, productive hour rate costing, life cycle costing, and technology accounting. All of these methods have common weaknesses. None of these methods isolate the definition of the cost of the product form the definition of the overall performance of the business. All of these techniques cause the apparent cost of the product to vary with volume yet manufacturing has done nothing different when volume increase or decrease. Paradigm Shift One of the major philosophical changes is the conversion of the costing base from the variables of materials, labor, and volume to the constant of time and time use of capital facilities in each operation. By allocating all indirect expenses to time use of facilities, indirect and general and administrative expense can be fully absorbed and the correct share of these costs can be precisely assigned t...
Cost accounting is the “measuring, analyzing and reporting of financial and nonfinancial information relating to the costs of acquiring or using resources in an organization.” (Horngren, Datar, Rajan, 2012). There are many different methods available to determine the cost of each various stage or product involved in producing a cost object, this paper will explore the differences and similarities between job costing and process costing.
Marginal costing provides a clearer picture of the cost over benefit for both consumer and the manufacturer for the greater good in order to help costing saving for consumer and improve company profit maximizing. This approach are appreciate by many company with its simplicity of how it operate and it can combined with other approaches such as budgetary and standard costing without much difficulty. This approach also ensures that the decisions taken will yield the maximum return to the business taking consideration of the break- even chart and profits
...pplied. Cost estimation and analysis could ultimately determine major decisions in both the business and political worlds today, and play a crucial role even in our day to day lives. Through activity based costing one is able to see what areas need improvement and also whether or not a business will be successful after considering all the factors. These tools are very powerful in drawing wise conclusions from cost analysis and can be a priceless tool to have even in the field of engineering.