While all three costing method would work for a newly existing company in various areas, the actual costing method would be best for the first few years. The reason for this rationale, is that the company is new to the business environment and it would take some time for managers to acclimate their operations and production levels. As time passes, managers will have to change their strategy to the normal costing to avoid losing consumers to its competitors. Firms’ have to be able to reduce costs for their products and services, without losing the quality of the products (Apak, 2012). Anderson & Dekker (2009) added that as the value of products and services increases, firms’ find it difficult to manage complex areas of operations, …show more content…
The ABC system can then apply the cost to modifying an original vehicle to the specifications of the customer. While an ABC system is beneficial for most manufacturing firms, the system does have some advantages and disadvantages that managers should take into consideration (Blocher et al, 2013).
Advantages
• Activity costs – the system is designed to monitor costs of each activity of a firm, for correlation with industry standards and ongoing activity costs and cost reduction.
• Better profitability – the system is designed to monitor consumer activities for overhead cost, to help managers understand which consumers are costing the firm more in overhead and less in profits.
• Process improvement – the system monitors distribution channels also, for overhead cost. In some cases, overhead cost from certain distributors are not worth the overhead.
• Improved planning – the system allows managers to determine whether or not it is best for the firm to produce a product or have another firm produce it.
• Cost of unused capacity – the system helps managers to determine the where to reposition resources, depending upon the margin of various products at various locations.
Disadvantages
• Cost volume – the ABC system works best with a large number of cost activities and continually running a cost analysis to maintain each activity. Therefore, for some small firms or firms with a few product lines will not benefit as well from the system.
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.
In a virtual corporation environment, I believe the ABC method to be the most ideal for accurately tracking the costs involved in manufacturing, storing, delivery, and sales. For Super Bakery, Inc. the addition of multiple outsourced companies to their processes meets the criteria of products with manufacturing complexity that requires differing degrees of support services (Kimmel, Weygandt, & Kieso, 2009, p. 876). As a result, I agree with Super Bakery Inc.’s decision to implement an ABC system.
In a virtual corporation environment, I believe the ABC method to be the most ideal for accurately tracking the costs involved in manufacturing, storing, delivery, and sales. For Super Bakery, Inc. the addition of multiple outsourced companies to their processes meets the criteria of products with manufacturing complexity that requires differing degrees of support services (Kimmel, Weygandt, & Kieso, 2009, p. 876). As a result, I agree with Super Bakery Inc.’s decision to implement an ABC system.
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
Activity-based costing (ABC) methodology is an instrument designed to provide accountants and managers with valuable costing information that will allow them to make sound strategic decisions. It is used as a secondary methodology rather than a replacement for the company’s primarily costing system. The ABC methodology identifies activities in an organization and for each activity it assigns a cost. The cost reflects the actual resource consumption by each activity that has been identified.
An in depth analysis of the current costing methods used by the beverage distribution company, Johnson Beverage Inc.
One of the best aspects of the way the time-driven ABC system was put into place at Kemps was how efficiently and accurately management determined the main issues with the current cost system and responded with appropriate and relevant solutions. For example, one of the greatest problems the company was facing was that many of its operating costs were spread out equally over a customer base that was growing more diverse and demanding more personalized and varied service, effectively cutting or potentially eliminating entirely Kemps’ profit margins for a product. Therefore,
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.
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,
4) The system keeps buffers between successive operations to maintain continuity of production (reducing the variability in demand at various stages).
Activity-based-costing (ABC) system find activities as the drive for each cost, calculate the average cost per driver’s activity, and times budgeted activities for budgeted cost. It is worth mentioning that ABC system is not used to find problems in cost records, or predict future cost based on that.
With this system each customer’s order cost the same amount to complete causing orders with high profit limits to subsidized orders with low profit limits making it difficult for Super Bakery to know the true cost for an order. The company changed to the activity-based costing (ABC) system allowing the managers the ability to recognize the cost and profit margins for each sale. The ABC system associates the costs with the activities allowing managers the opportunity to access a system that allocates overhead costs that uses multiple bases. Costs can be traced back to each individual’s account regardless of the product provider letting managers know which products are profitable and which ones are not. The traditional costing system allocates cost to departments or jobs instead of overhead cost pools. The traditional costing system makes it difficult to know which activity or product is making a profit.
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
ABC refers to cost attribution to cost units on the basis of benefit received from indirect activities e.g. material ordering, material handling, machine setups, quality assuring, customer support services etc. For each such activity, it is necessary to identify a cost driver that causes incurrence of cost relating to that activity. For example, hours spent on testing for a quality assurance activity may be used as application base of cost driver for this activity.