Activity-Based Costing ( ABC ) Essay

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Activity-Based Costing ( ABC )

Summary

The business environment in the 1990s is markedly different from that of the past when conventional cost accounting procedures were established. Activity-based costing (ABC), pioneered in the late
1980s, offered a new costing approach consistent with the changed environment. However, ABC did not diffuse rapidly into the business community. This article demonstrates why adopting ABC is important by documenting the potential of ABC in supporting contemporary managerial decision making.

Introduction

Everything happens faster in business today. Even new management tools
(some say "fads") follow a meteoric path. For example, the ink on new articles describing activity-based costing (ABC) was hardly
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The "corporate socialism" in which some products pay the bills of other products is exposed. It is the purpose of this article to illustrate how ABC more accurately reveals the true costs of operating in the business environment of the mid-1990s and supports managerial decision making by providing information consistent with this environment. Beyond the smoke and mirrors, ABC can contribute to success. What is ABC?

The full cost of a manufactured product or line of products includes direct labor, material, variable overhead, and fixed costs. Direct labor and material are normally observed and measured by manufacturing and maintained as "standards." The overhead costs are reported by responsibility centers, such as departments or plants. The difficult decision is what to do about allocating overhead costs to products or territories. The typical business uses a two-step system for absorption costing in which costs are accumulated in a pool and then allocated to specific products based on a single, plant-wide base, such as direct labor hours utilized in producing the product [2]. Other allocation bases are machine hours or direct labor cost, for example. The wide use of direct labor hours as an allocation basis is historical. When cost accounting systems were being developed in the mid-1920s, labor was a major cost and thus a target of management attention. However,
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