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
The week four individual paper addresses the implementation of Activity Based Costing (ABC) by Super Bakery, Inc., a virtual corporation founded by Franco Harris. Specifically, management strategies, the reasoning behind an ABC system, and the alternatives of a job order cost system or a process order cost system are assessed for this enterprise.
In 1995 the Australian Society of CPAs initiated a major survey on ABC amongst Australian manufacturers. This survey, which was conducted by the University of Technology, Sydney, involved 213 firms covering all aspects of Australian manufacturing (Corrigan, 1996; Wood, 1996). This survey showed that 45 per cent of the surveyed firms had never considered adopting ABC (although 88 per cent of those surveyed acknowledged awareness of activity-based costing), 29 per cent were still in the process of considering adopting it, 14 per cent had considered and rejected it and only 12 per cent of the firms surveyed had actually implemented it. The highest adoption rates of ABC were found amongst the food, beverage and tobacco industry with 25 per cent of this group using this method.
Under an ABC system, the allocation of costs to products is achieved through at least four analytical steps. Firstly, costs are grouped into activity levels. Secondly, cost drivers are
Activity-based costing (ABC) methodology is an instrument designed to provide accountants and managers with valuable costing information that will allow them to make sound strategic decisions. It is used as a secondary methodology rather than a replacement for the company’s primarily costing system. The ABC methodology identifies activities in an organization and for each activity it assigns a cost. The cost reflects the actual resource consumption by each activity that has been identified.
Absorption costing is used for all outside reports. All non-direct fixed costs are allocated using various allocation bases as indicated throughout the project. The Company does not use a full ABC costing system; however, it does employee some of the ABC concepts in the budgeting process.
As previously mentioned, the use of activity-based costing gives Kemps an advantage when competing for customers in an ever more competitive and growing market. However, the ability to succinctly distinguish how many small changes, when taken together, can have a large impact on cost savings (and therefore profit), is necessary in order to convince customers who may not be familiar with the many benefits of ABC. Mainly, management would want to demonstrate how the cost savings that they enjoy are ultimately passed on to their customers, perhaps by showing some of the improvements that have been made to their own company as a result of implementation, specifically focusing on advancements that would have a direct impact on the customer’s business.
3. Under the new activity-based costing (ABC) system, compute the indirect cost allocation rates for each of the three activities:
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,
Significant resources were needed to implement a complex system like ABC and it is also strategic in nature (Arnaboldi & Lapsley, 2005).
Activity-based-costing (ABC) system find activities as the drive for each cost, calculate the average cost per driver’s activity, and times budgeted activities for budgeted cost. It is worth mentioning that ABC system is not used to find problems in cost records, or predict future cost based on that.
HP in 1994 decided not to integrate the ABC in the Cost Accounting Information System (abbreviated CAIS) for a number of reasons. The first reason is that at that time the CAIS was implemented in all HP business units worldwide. This system was considered very complex and difficult to change. Because ABC was only used in one business unit it was thought to be insensible to change the whole system. The second reason is connected to the codification of the operations in the CAIS. If the ABC would be integrated this system would have to be reorganized and all the employees would have to learn to operate the new
With this system each customer’s order cost the same amount to complete causing orders with high profit limits to subsidized orders with low profit limits making it difficult for Super Bakery to know the true cost for an order. The company changed to the activity-based costing (ABC) system allowing the managers the ability to recognize the cost and profit margins for each sale. The ABC system associates the costs with the activities allowing managers the opportunity to access a system that allocates overhead costs that uses multiple bases. Costs can be traced back to each individual’s account regardless of the product provider letting managers know which products are profitable and which ones are not. The traditional costing system allocates cost to departments or jobs instead of overhead cost pools. The traditional costing system makes it difficult to know which activity or product is making a profit.
Nowadays, we know that activity based costing system assigns overhead costs to products or services products that using a two-stage process, which focuses on activities. ABC is a relatively new and very important topic in managerial accounting. ABC allows us to find a way that we could determine the profitability of every product, profitability of every customer we serve, and the profitability of our process. Contents in brief, first that comparing potential advantages of ABC versus traditional costing methods. The
C. T. Horngren, A. Bhimani, S. M. Datar, G. Foster (2005), 'Activity-Based Costing', Management and Cost Accounting (Prentice Hall Europe), 345-363
ABC refers to cost attribution to cost units on the basis of benefit received from indirect activities e.g. material ordering, material handling, machine setups, quality assuring, customer support services etc. For each such activity, it is necessary to identify a cost driver that causes incurrence of cost relating to that activity. For example, hours spent on testing for a quality assurance activity may be used as application base of cost driver for this activity.