Activity based costing essay. Activity Based Costing Essay Free Essay Example 2022-10-17
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Activity-based costing (ABC) is a method of accounting that aims to provide a more accurate representation of the costs of producing a product or providing a service. It does this by assigning costs to specific activities that are involved in the production process, rather than simply allocating them to the final product or service as a whole. This allows organizations to better understand the true costs of their operations and make more informed decisions about how to allocate their resources.
One of the main advantages of ABC is that it takes into account the many different activities that go into producing a product or service, rather than just considering the final output. This can be particularly useful in industries where there are a large number of variables involved in the production process, as it allows organizations to identify which activities are the most costly and where they can make the most impact by making changes.
For example, consider a manufacturing company that produces a range of different products. Under traditional costing methods, the company might simply allocate all of its overhead costs (such as rent, utilities, and salaries) to each product based on the number of units produced. However, this approach does not take into account the fact that different products might require different amounts of resources and activities to produce.
Using ABC, the company could instead assign costs to specific activities, such as machining, assembly, and testing. This would allow them to see which products are the most resource-intensive and therefore the most costly to produce. They could then use this information to make informed decisions about which products to focus on and how to allocate their resources more effectively.
There are a few key steps involved in implementing ABC. First, the organization must identify the activities that are involved in the production process and determine the costs associated with each one. This might include both direct and indirect costs, such as the cost of raw materials, labor, and overhead expenses. Next, they must assign costs to each activity based on the resources consumed, such as the number of hours or the amount of equipment used. Finally, they must allocate these costs to the products or services being produced based on the amount of each activity that was required to produce them.
While ABC can be a useful tool for understanding the true costs of production, it is important to keep in mind that it is not without its limitations. One potential drawback is that it can be time-consuming and resource-intensive to implement, as it requires a detailed analysis of the production process and the costs associated with each activity. Additionally, it may be difficult to accurately assign costs to certain activities, particularly if they are complex or involve multiple stages.
In conclusion, activity-based costing is a valuable method of accounting that allows organizations to better understand the true costs of their operations and make more informed decisions about how to allocate their resources. While it is not without its limitations, it can be a powerful tool for improving efficiency and maximizing profitability.
Activity Based Costing Essay
XU JI Electrical Company Limited Though activity-based costing has been widely adopted in the Western world, there is still increased skepticism among many companies operating in developing economies of its effectiveness. Body Background Description of ABC According to Krishnan 2006 , the ABC craft emerged when Alexander Hamilton Church set the idea in motion in 1901, by way of drafting overhead-themed manuscripts. The traditional method besides known as the conventional method assigns or allocates the mill 's indirect cost to the points manufactured on the footing of volume such as the figure of units produced, the direct labor hours, or the production of machine hours Huntzinger, 2007. The difficult decision is what to do about allocating overhead costs to products or territories. What is my holding cost? If the cost system resulted in destroy merchandise cost Begin reported, than the overhead cost merchandise willed to higher command monetary value in concern and concern loss to those rival to be able to cite lower monetary value ill because the cost system produce more accurate cost information. This is a concept that is applicable in the business field in order to improve its competence and productivity. Identification of the most suitable cost driver in each activity See Fig.
However, in as much as the activity-based costing technique has been beneficial to many organizations; many are also finding it very difficult to implement it. It will calculating out where the money and energy is traveling, attempts can be focused upon those merchandises that are eating up the most clip and energy and this finally lead to a bead in cost, in theory, as attempts will be made to cut down the costs on the majority of the merchandises. Oseifuah defines ABC as an innovative cost accounting practice that cyphers and evaluates the cost and efficacy of activities, cost objects, and resources 2014, p. The role of financial management in business Financial management is fundamental to the success of a business and the strength of its financial 'health'. Haider projects that detection and prevention tasks help deflect inadequacies that cause professors, lecturers, and other staff members furnish inadequate schedules, curricula, and syllabi 2009. This is largely due to the limits imposed by maintaining patient safety. The British Accounting Review, 39, 249 — 264.
What is ABC analysis full form? Cost Reduction through ABC 6. Johnson and Kaplan underlines that cost-based accounting and budgeting deals with the efficient allocation of resources. New ABC Costing Framework Krishnan 2006 outlines a number of procedures, as discussed below that the XYZ institution can follow to achieve a successful integration of the new ABC costing framework. Through this analysis, it is possible to determine the parts of the business that function the most efficiently and locate the parts that do not. A Comparison of the Product Costing Practices of Large and Small- to Medium-Sized Enterprises: A Survey of British Manufacturing Firms. ABC will be one of the costing systems that I will use in my future career.
It is therefore vital for organizations that have a problem going past the design stage of the ABC model to have a steering committee that specializes on moderating the tasks to be covered at this stage. Applied Time Series Modelling and Forecasting John Wiley and Sons ISBN 0470844434 Glynn, J. ABC considers all the activities as absorbed in the production of goods and services, in any organization. Since the use of breakeven analysis assumes that fixed cost are constant to a particular level of sales, only a change in the level of sales and the variable costs will result in any change in the breakeven point. All costing models are attempting to discover the "correct" cost 1. There are many initiatives presently underway to meet the growing need of health care for a population that is greatly under-insured and many that are uninsured. The activity-based costing and activity-based costing budgeting include the elements of organizational structure most prevalent and essential to a proper functioning of a management accounting system and the theories of organization essential to an identification of the significant elements that approximate the patterning and order in organizations.
Activity Based Costing and Activity Based Budgeting
This is especially important eithin the concept of a market equilibrium, where any individual would be just indifferent between different choice alternatives presented by the market. Activity-Based Costing Organizations that need help being more efficient and cost effective look to different concepts for help, one such concept is activity-based costing. What are the Advantages and Disadvantages of ABC Assimilation? My Role My role was to work within the business, recruiting for vacant positions and training existing employees in order that they were able to attain relevant skills for their roles. . Traditional cost accounting deals mainly with cost accumulation, inventory valuation, and product costing.
A long-term objective was also established, and it was meant to transit the company into a long-term activity-based costing management criterion. Moreover, activity based costing was also started to create clear direct performance measures precisely for costs, time and quality outcomes for variety of activities. Firms need to remain competitive, which indicates that the market will set prices to some degree. By using activity-based costing, a company can treat more indirect costs as direct costs. Product costing is a highly sensitive area for managerial accountants, recently, most of them have changed their focus such that they give their attention to appropriate treatment costs which are directly associated with resources that are committed to support activities, which within the company do not vary proportionally to production once the initial capacities have been set. The members came from finance committees, product engineering, operations management, and other functional teams of the organization, but extra assistance was also sought from external organizations to enable the company effectively implement the ABC model Juras 2003, p.
Activity based costing system besides used to find merchandise costs for particular direction studies Weetman, 2006. Inasmuch as decisions are future-related, this involves the concept of environmental stability. From this analysis, we can see that the inclusion of the bottom-level and top-level employees in the implementation process was critical to the acceptance of the costing technique. This virtually means that the reader will not know what accounting systems the company uses. Direct cost, is the cost which can be identified with the merchandise, while indirect cost are non straight accountable to a cost object for illustration cost of stuffs, direct labor cost such as rewards and wages are illustration of direct cost Ryan,2004. Retrieved Apr 2, 2009, from Managers-Net: Activity-based costing ABC : What is it and how can reengineering teams use it? This approach triggers immediate improvement in an organization Swamidass, 2000. Lucas, Mike, Standard costing and its role in today's manufacturing environment.
Activity Based Costing Essays: Examples, Topics, Titles, & Outlines
Relevant information is that which provides for public accountability and also facilitates public decision making regarding social choices and social resource allocation. These costs would remain the same no matter what output the activity produced. But these products can not be produced in large volume. Questions that will assist in quantifying the relationship between resources and activities include: How much time is spent performing each activity? In a traditional costing system, the cost of products may appear distorted because it uses a single, volume based cost driver. Activity-based costing allows for the different stages of a process the activities to be costed in an effective manner, including costs that are traditionally assumed as overheads. This breakeven point in dollars is reached through the product of the unit selling price multiplied by the breakeven number of units.