The Emergence of Abc Systems

Assuming that the company’s goal is to maximize profits, the current cost system is not an appropriate tool for strategic planning. The ambiguity of the overhead costs per product makes it difficult to accurately analyze the cause and effect relationships of changes and/or improvements to specific product line.

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.

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.

Wilkerson employs a Normal Cost System, which means that they use predetermined overhead rates along with actual costs for direct material and direct labor. Normal costing systems are appropriate when overhead costs are a relatively small percentage of total manufacturing costs and product diversity is limited. For Wilkerson, normal costing does not make sense. Overhead costs make up over 50 percent of total manufacturing costs and their product offering is relatively more diverse. This indicates that the current accounting system in place may be distorting costs significantly. Supporting data:

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

Under a traditional system, overhead cost is allocated to an activity based on hours or rates for direct labor or machine usage. However, this approach does not clearly indicate how much overhead cost will be needed in order to complete a job through a particular function. ABC methodology is to be used as an alternative to traditional accounting where a business 's overhead costs (indirect costs such as electrical energy consumption for heating or cooling, or indirect cost associated with marketing) are allocated as a proportion of direct costs, to an activity. This approach is unsatisfactory because there can be cases where two activities could absorb the same direct costs

In using ABC overhead costs are distributed differently across the three products, but in total they are the same, in total. However, ABC changes the information that managers receive to make effective business decisions, which will ultimately result in improved business results.

ABC is a method utilized by organizations to establish costs for each product or service that the business provides. The ABC method utilizes cost drivers to determine indirect cost, as well as direct costs and volumes to ascertain costs that pertain to the product or service that the business delivers (Nowicki,

3. Under the new activity-based costing (ABC) system, compute the indirect cost allocation rates for each of the three activities:

Q3. How were the limitations of the existing cost system overcome by the ABC Cost System? What are the implications of the ABC system?

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,

Furthermore, there is costing system option is Activity Base Costing (ABC). ABC is a method to help with the concerns of properly allocated overhead costs. The main objective with ABC method the overhead cost will be assigned to different cost pools and then

Activity Based Management (ABM) is a management approach that aims to maximize the value adding activities while minimizing or eliminating non-value adding activities. Generally, the objective of Activity Based Management is to improve efficiencies and effectiveness of an organization in costs management and marketing.

Once costs of the activities have been identified, the cost of each activity is attributed to each product to the extent that the product uses the activity. In this way ABC often identifies areas of high overhead costs per unit and so directs attention to finding ways to reduce the costs or to charge more for costly products.

Nowadays, the development of technology allow the company reduce the cost from direct labour and material cost, but the indirect or overhead cost become significant high. Therefore, price decisions on each product become essential. ABC costing system is a form of splitting overhead costs into different overhead activities. The costs are then allocated to products or projects proportionally by their cost driver activity levels. In another words, this system result the manager to look at the more accurate overhead cost from each products which they producing, then find out the intrinsic value of the product to make a fair price decision.