Business Model Of The Theory Of Activity Based Costing

Glaser Health Products manufactures medical items for the health care industry. Production involves machining, assembly and painting. Finished units are then packed and shipped. The financial controller is interested to introduce an activity-based costing (ABC) system to allocate (or distribute) indirect costs to products. Indirect costs, as distinct from direct costs, cannot be unambiguously linked to specific products. The controller would like to calculate product costs based on ABC for planning and control, not inventory valuation.

Activity Based Costing is a method whereby costs are assigned to products or services based on the resource that they consume, it is an alternative of traditional accounting where business overheads, indirect costs such as lighting, heating, and market are allocated in proportion to an activity direct cost.

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.

Activity-based costing (ABC) is a special costing model that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each. This model assigns more indirect costs (overhead) into direct costs compared to conventional costing models.

the more popular models for collecting and tracing costs is known as activitybased costing (ABC). This article examines how one government acquisition

Traditional costing is an easily implemented costing method that aligns with generally accepted accounting principles, GAAP. Traditional costing is the distribution of manufacturing overhead costs across the number of products produced based or another volume based metric. Traditional costing is very simplistic in the fact that it doesn’t allocate out any nonmanufacturing costs. Traditional costing allocates costs to generic buckets such as direct material, direct labor and other overhead. Activity based costing (ABC) was developed as a costing method to overcome the weaknesses of traditional costing. ABC allocates costs to every activity, or manufacturing task, associated in the production of an item. ABC is more accurate than traditional costing. Competition Bikes grouped the following as tasks associated with the manufacturing of bicycles; Factory Setups, Quality Control, Engineering Service, Product Movements, Utilities, and Depreciation. (Johnson, n.d.)

Activity-based costing – this is a flexible method of pricing that is being used increasingly in the travel and tourism industry. Its looks at all cost, fixed and variable and focuses on what drives them in order to arrive at a final price to charge.

This paper will discuss and analyze the concepts of Activity- Based Costing (ABC) in the manufacturing industry. Specifically, the document will focus on General Motors (GM), and the innovation of one of their manufacturing facilities who used ABC to predict energy usage in the manufacturing of automobiles. The study yielded a successful ABC predictive energy model which provided a structure for competitive advantage for the corporation.

On the other hand, Activity-based costing (ABC) attempts to accurately trace indirect costs to products by allocating indirect costs to activities and then to products based on their usage of the activities. In order to counter the flaws of the Traditional Costing System, most organizations have adopted the ABC method. ABC is an effective way to allocate the indirect costs and it leads to more accuracy because it relies upon a greater number of activity and resource cost drivers rather than only focusing on volume based cost drivers. Also in contrast to the traditional costing system, ABC is optimal when indirect costs are higher as it utilizes several indirect cost pools and divides the production function into many activity areas. The activity based approach provides a precise breakdown of indirect costs and eliminates the allocation of irrelevant costs to a product therefore providing a more exact reflection of product and customer profitability. Thus, unlike traditional costing, ABC gives equal importance to other factors such as business competition, accuracy, customer satisfaction, product development etc. It’s emphasis on product efficiency helps the company establish a

The implementation of an Activity-Based Costing system would in many ways help a company due to the simplistic process for which it accounts for materials and direct labor. According to James D. Tarr, MBA “Activity Based

Abstract- In today’s competitive world, apart from a few isolated cases (e.g. luxury goods), the selling price of a product is predefined by the market because customers are not willing to pay more than a certain amount of money for the product. Hence cost is one of the most influential factors in the outcome of a product or service. Hence over the past years different costing techniques are evolved such as operation based approach, case based, break down approach, feature based costing, Activity based costing, time-driven activity based costing etc. These techniques are classified based on techniques with similar features. They are mainly classified into qualitative techniques and quantitative techniques. Qualitative cost estimation techniques are based on a comparison analysis of a new product with the products that have been manufactured previously in order to identify the similarities in the new one. Whereas the quantitative techniques are based on a detailed analysis of a product design, its features, and corresponding manufacturing processes. Therefore quantitative techniques are more preferred. Time-driven activity based costing is a relatively new tool based on quantitative technique.

Managerial accounting is a discipline within the accounting community that focuses on providing valuable information to the leaders of their organization. The importance of the community relies on its ability to provide information that is not readily found in traditional financial statements developed in the accounting department for reporting to outside agencies. Activity-based management utilizes information developed using activity-based costing (ABC) to accurately determine product costs. Accurate and detailed information is required for an organization to reliably budget for the upcoming quarter or year. A complete understanding of the significance of activity-based costing and thorough knowledge of budget concepts are critical

Robert S. Kaplan and Robin Cooper was designed the activity based costing (ABC) method in 1988. It was felt that there was a need for more accurate and up-to-date information and a more proactive approach to planning and managing the costs. ABC is a process to identify the costs of all activities and allocating, applying, assigning or tracing costs to products. Activity based costing is a costing technique, tool, system, mechanism or approach. It may be used in addition to the current traditional system or used in place of it. This will enable the new system to be applied consistently so that the opportunity to revert to old ways is limited. Activity based costing is aims to cost the products independent of output volume and to apply

1. What is Activity Based Costing (ABC)? 1.1 What is ABC and Why should it be used? 1.2 Traditional costing vs ABC 1.3 Activity based costing processes 2. How ABC should be used to manage (Activity based management)? 2.1 When to use ABC? 2.2 How to use ABC for ABM? 2.3 Scoring High - Low value adding activities 2.4 Activity Based Management applications 3. ABC/ABM implementation 3.1 Where ABC has been used 3.2 Steps to develop ABC Cost Flow Model 3.3 ABC Implementation Project 3.3 Challenges and success factors Appendix: KPMG ABC and Cost Optimisation tools

 Activity Based Costing (ABC) is a two-stage product costing method that assigns costs first to activities and then to the products based on each product 's use of activities. , ABC systems first accumulate overhead costs for each organizational activity, and then assign the costs of the activities to the products, services, or customers (cost objects) causing that activity. Activity analysis is the processes of identifying appropriate output measures of activities and resources (cost drivers) and their effects on the costs of making a product or providing a service.