This website uses cookies to ensure you have the best experience. Learn more

Activity Based Costing Essay

2554 words - 10 pages

Introduction

Activity-based costing (ABC) is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” as well as variable costs. Activity-based costing is mostly used for internal decision making and managing activities while traditional costing method is used to provide data for external financial reports. Most organization uses activity-based costing as an addition system for using traditional absorption costing as sometimes the traditional cost system misleads the product’s profitability. In a company, there are many products on sale, if one product is sold at a high price with low product margin and a product with high product margin at a low price, it may result in a loss. In addition, due to the reason that cost drivers and enterprises business may change, activity-based costing analysis also needs to be revised periodically. This amendment should be prompted to change pricing, product, customer focus and market share strategy to improve corporate profitability.

Importance factors that lead to successful implementation in activity-based costing

Firms today are trying to introduce activity-based costing into their system, however, some firms are unsuccessful in the implementation, which later result in abandoning the ABC system. According to research, the reason of failure ABC implementation in People’s Bank of China is due to lack of a clear business purpose about the implementation, lack of education about ABC, poor ABC model design, lack of participants, individual and organizational resistance to change, and few outsourcers available. To solve these problems, top management support and cross-functional involvement are required. Top managers are important characters to motivate all employees to embrace the need to implement ABC. In addition, they should also ensure that ABC data is used to help evaluation and in rewarding employees. If top managers do not use ABC system to evaluate and reward employees, abandonation of the system may be resulted as employees felt the ABC system is unimportant. To successfully implement ABC system, cross-functional involvement is also essential since employees from different department that are using ABC system possess knowledge of the operations that is needed to design an effective ABC system. It decreases the possibility of intransigence since employees feel like the they are important and included in the implementation process. People’s Bank of China failed to implement ABC system because employees in the company do not transigence with the ABC and the restriction of China’s rules. If People’s Bank of China understand the importance of top management support and cross-functional involvement, it would be possible for them to implement ABC system for improvement of the banks.

Activity rates help targeting improvement

In activity-based costing, an activity is any event that causes the...

Find Another Essay On Activity-based costing

Activity Based Costing in Government Essay

2529 words - 10 pages by China, but all over the world. The significant changes in the world's market mechanisms influenced the development of a new managerial accounting methodology, called Activity-Based Costing. "A powerful tool for measuring performance, Activity-Based Costing is used to identify, describe, assign costs to, and report on agency operations". Activity-Based Costing, ABC, is simply assigning costs to activities based on how the costs are consumed by

Activity Based Costing at IT Service Desk

2049 words - 8 pages inexpensive to implement, but the information obtained could be too raw to be analyzed. ABC solves that problem but is expensive and time-consuming (Abdallah & Li, 2008: 12).(Kaplin, Robert & Cooper, 1997: 83)Activity Based CostingActivity-based costing begins with companies' products, determines the activities used in production and delivery of these products, and computes the cost of various activities. The costs of the activities used

Absorption/Full Costing, Variable/Marginal Costing, and Activity Based Accounting

3100 words - 12 pages Introduction The contained paper has been prepared with objectives of elaborating over the three different costing methods namely, Absorption/Full Costing, Variable/Marginal Costing, and Activity Based accounting. The first segment of the report seeks to define and illustrate the costing methods based on the personal understanding of the writer gained through the class room and the academic readings. Part two of the report takes a form of short

Activity Based Costing, Activity Based Budgeting and Activity Based Management Analysis

1472 words - 6 pages In this section of the report, we shall discuss the interlinked processes of Activity Based Costing, Activity Based Budgeting and Activity Based Management by using the help of certain diagrams and also touch upon the evolution of the Activity Based approach over time. The diagram shown above explains how costs are assigned to a product under the ABC approach. ABC first assigns costs to the activities that are the real cause of the overhead

ABC--- The Proponents Of Activity Based Costing Claim That This Approach To Costing Provides More Accurate Product Costings. On What Do They Base These Claims

945 words - 4 pages the correlative importance of direct labor cost as production costing. As a result, management accounting is trying to use more logical and efficient way to admeasure costs in the new fields.According to Larry Sawyer said, the tenth commandment of accounting is "to know new methods" (Lawrence B. Sawyer 1983). Activity-based costing (hereinafter, ABC) systems is clearly a modern method which is increasingly being used in management accounting place

It is argued that the Activity Based Costing approach produces more accurate product cost information. Critically evaluate the strengths and weaknesses of this statement.

2296 words - 9 pages cost system that was both innovative and sophisticated. This alternative as suggested by Cooper and Kaplan (1988) was Activity Based Costing (ABC) based on the following theory (Harvard Business Review (1988)):"Virtually all of a company's activities exist to support the production and delivery of today's goods and services. They should therefore all be product costs."Further on they published a series of articles that explained the key ideas that

cost information for decision making

621 words - 2 pages Two common costing systems used in business are traditionally cost accounting system (job costing, process costing and operating costing) and activity-based costing system (ABC). There are some similarities and differences between these systems. Regarding the similarities, both accumulate product costs throughout the production process and assign those costs to individual units of production. Additionally, product cost under two costing systems

Cost Management

1173 words - 5 pages bottom line, while a dollar increase in sales may in fact produce a loss to the bottom line” (Reider, 2011). Methods that can be used to manage costs are lifecycle costing, target costing, Kaizen costing, activity-based management, and business process reengineering. Life-cycle costing, target costing and Kaizen costing are all methods of cost management and will be the focus of this essay. How they are used to control costs and the advantages

use standards asc

3958 words - 16 pages costing is relatively easy to set-up and requires less financial capabilities to do so. It is generally agreed that costing systems, such an Activity Based Costing (ABC) system can give a more accurate costing of products and services, because it identifies activities in an organization and assigns the cost of each activity resource to all products and services according to the actual consumption and provides a more accurate allocation of indirect

use statnd asc

3958 words - 16 pages costing is relatively easy to set-up and requires less financial capabilities to do so. It is generally agreed that costing systems, such an Activity Based Costing (ABC) system can give a more accurate costing of products and services, because it identifies activities in an organization and assigns the cost of each activity resource to all products and services according to the actual consumption and provides a more accurate allocation of indirect

use stand 2 mexida

3965 words - 16 pages standard costing is relatively easy to set-up and requires less financial capabilities to do so. It is generally agreed that costing systems, such an Activity Based Costing (ABC) system can give a more accurate costing of products and services, because it identifies activities in an organization and assigns the cost of each activity resource to all products and services according to the actual consumption and provides a more accurate allocation of

Similar Essays

Activity Based Costing Essay

1829 words - 7 pages EXECUTIVE SUMMARYThe purpose of this report is to present the pilot Activity-Based Costing (ABC) for the University. The emergence of ABC systems has been viewed as the means by which management accounting can re-establish its relevance. It became popular towards the 1980's, because it prevents cost distortion and provides a process view with traditional accounting cannot provide.The University is considering adopting ABC because the widespread

Activity Based Costing ( Abc ) Essay

1441 words - 6 pages Activity Based Costing ACTIVITY BASED COSTING AND MANAGEMENT : AN OVERVIEW Activity Based Costing (ABC) is more relevant than traditional costing in companies, where product mix is diverse in; batch sizes, physical sizes, degree or complexity, and raw material characteristics. ABC will also provide more decision useful information for the service industry, characterized by diversity in range of services provided. If the products in a

Activity Based Costing ( Abc ) Essay

3081 words - 12 pages 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. This article demonstrates why adopting ABC is important by

Activity Based Costing (Abc) Essay

2069 words - 8 pages foreordained overhead rate then assign overhead by applying this normal overhead rate to the cost object. Requisition of such models is authentic for offices generating goods with less differing qualities. In any case, as manufactured goods differ, the wide averaging methodology prompts severe cost variations (Johnson and Kaplan, 1987, Cooper and Kaplan, 1988). A more refined overhead allocation system, for example, Activity Based Costing (ABC) plans to