Contributions of Activity-Based Costing (Abc) to the Modern Business Environment

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Contributions of Activity-Based Costing (ABC) to the Modern Business Environment

In the increasingly competitive business environment, the enterprises who intend to maintain and enhance competitive advantages must build an efficient costing system to control, plan and decide how to improve the profitability and efficiency of the operation. Activity-based costing system (ABC) is such an advanced costing system that satisfies the needs of companies in modern business environment. This essay gives a whole picture about the ABC from five parts: background introduction, definition of ABC, comparison with traditional costing system, evaluation of ABC and conditions of acceptability. The reason for the development of activity-based costing
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Apportionment for Department A is £75,000(cost per transaction is £5,000), while it for Department B is £25,000(cost per transaction is £5,000).Apparently, the result of traditional approach does not correspond with actual situation. Therefore, it is essential to realise the differences between traditional costing system and activity-based costing.
Comparison between traditional absorption costing system and ABC
Before ABC was introduced in 1980s, the traditional absorption costing system was commonly design at a time when there was a narrow product range and the use of technology as a factor of business environment was limited. Generally, the absorption costing means all of the manufacturing costs are absorbed in unit, and its process involves allocation, apportionment and absorption of overheads using overhead absorption rate (OAR).
Comparing absorption costing system with ABC, the primary difference between them is the approach. Absorption costing is a traditional cost accounting method operating under the simple system of allocating resources to products or services directly into units, while activity-based costing is a
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