A Report On The Abc System

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Blocher et al (2013), says that the ABC system is relatively new to cost accounting; however, some industries within the government and non-profit agencies use the system for improving cost determination. Additionally, the ABC system is utilized to maximum profitability, while ensuring adequate resources is available to meet demand (Kirche et al, 2005). However, in order for firms to adopt a costing system, managers must understand how beneficial the system can effectively improve the firm’s profits. An ABC system identifies gaps in the old-style accounting systems and recognize the relationship between products and customer. Furthermore, the system identifies high impact areas for process improvements (Kirche et al, 2005). At the same…show more content…
• Resource Consumption – a measurement of demand for resources by an activity.
• Activity Consumption – measures the amount of an activity performed for a cost object.
• Cost objects – any item that separately priced or measured in cost.
Although, managers should have some basic knowledge of the above components, filtering this information down to subordinates, will help them understand the importance of their positions within the firm. Furthermore, employees’ understanding this concept will have a positive impact on profits within a firm. The efficiency of the production unit is an internal factor, as with external factors such as inflation and cost increase for raw materials, both can affect the production cost in one way or another (Khataie et al, 2010). They also added that manufacturers can benefit from a dynamic approach of how the productions are treated.
The ABC system allows managers to allocate resource cost to cost objects such as product, services, or customers; whereas, the costing approach of a firm’s products or services are the result of activities with associated cost (Blocher et al, 2013). However, Khataie et al (2010) stated that an ABC system begins with identifying the production process and the estimated costs associated with each individual activity. Blocher et al (2013) says that there are three steps to developing an ABC system and the ABC process, is to determine which resources are needed for a specific activity;
1) Identify resource
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