Objectages And Advantages Of Activity-Based Costing System

Overhead costs are not in proportion to the production output because of the method they are using. This leads to inaccurate pricing and costing decisions. An Activity Based Costing System would help find the real relationship between the products produced and overhead.

Activity-based costing can be defined as the managers allocate costs depending on the quantity of resources a product or service consumed in the manufacture of goods and services. The activity based

Activity-based costing is a system of accounting that puts emphases on activities performed to produce products or services (Schneider, 2012). In this costing system every activity is assigned a cost (Schneider, 2012). The goal of activity-based costing is not to allot common costs to products but to measure and then price out all the resources used for activities that sustain the production and delivery of products and services to customers (Mazumder, 2007). Activity-based costing is a cost system that is useful in business because of the fact that it does account for the cost of the products, resources used to produce the product and delivery of the product.

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.

The first item at hand is what kind of detail does activity based costing provide that is different than traditional costing?

This paper provides a brief presentation of Activity-Based Costing methodology, how is used as well as its short comings.

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,

1. Use the Overhead Cost Activity Analysis in Exhibit 5 and other data on manufacturing

An activity-based costing system is meant to perform the role of operational control as well as to provide the basis for costing inventory for financial reporting.

|In activity-based costing, Work in Process is credited when overhead is applied to products using activity rates. |

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

Activity-based management, activity-based costing and continuous improvement, all these help in the improvement of the efficiency in manufacturing, better control of overhead costs and the accurate costing of products. With this in mind, We disagree with the advice that Chuck Davis, the firm’s controller, gave Leonard Bryner. The traditional way of costing produce average costs that severely overstated or understated. Without the accurate costs, the firm would not be able to price properly their products and that would be damaging to the firm. With activity-based costing and management, all costs are accounted for with the help activity-drivers and overhead costs are decreased. In turn, the costs that the firm has for their products are more accurate and pricing is much easier.

This case study investigated the implementation of activity-based costing (ABC) at Super Fast Engineering Co. Ltd (Super Fast), a large manufacturing company in China. Super Fast formerly is a state-owned enterprise (SOE), which turned public limited company (PLC) later. In December 2001, when ABC concepts were at a theoretical level in China, the company had piloted ABC implementation in its main production divisions in its subsidiaries. (Liu and Pan, 2007).

Comparision two methods presents DRURY: “ Both use a two- stage allocation process. In the first stage a traditional system allocates overheads to production and service departments and then reallocates service departments costs to the production departments. An ABC systems assigns overheads to each major activity ( rather than departments). With ABC systems, many activity- based cost centres ( activity costs pools) are established, whereas with traditional systems overheads tend to be pooled by departments, although they are normally described as cost centres. (DRURY P.253) In other words the traditional method concludes that products cause the costs, ABC assumes that “ activities cause cost and that cost objects create the demand for activities” (Turney, p.51). Therofore, this system can be answer for companies seeking “true” cost information. Comparision of two methods is in ABC favour, as “is more accurate cost allocation method compared to traditional approach and, thus, is a better approach for managerial decisions such as pricing strategy, particularly, in heterogeneous product settings.” (RUHUPATTY P.5).

Even for smaller businesses, the implementation of an activity-based costing system can be a substantial undertaking. The added precision of the activity-based system can only be achieved if the small business owner is willing to put in the time to analyse the manufacturing process with enough detail to determine how overhead costs are incurred. Due to the difficulty of implementation, many small business owners don 't believe the benefit of an activity-based system outweighs the costs. (John, nd.)