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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 concern about rising costs for higher education and the unique characteristics of universities that make for special challenges.The report discusses the various changes in the manufacturing sector with regard to the introduction of ABC and shows how this method can be employed in a higher education institution. It also discusses the advantages and disadvantages of using ABC and explains how ABC may, or may not help the university control its costs.TABLE OF CONTENTSTABLE OF CONTENTS 1INTRODUCTION 2MAIN BODY 2CHANGES IN THE MANUFACTURING SECTOR WITH REGARD TO THE INTRODUCTION OF ABC 2HOW ABC MAY BE EMPLOYED IN A HIGHER EDUCATION INSTITUTION 3ADVANTAGES OF USING ABC 3DISADVANTAGES OF USING ABC....................................................................................................................... .....4HOW ABC MAY, OR MAY NOT HELP THE UNIVERSITY CONTROL ITS COSTS 4CONCLUSION 4APPENDIX 6APPENDIX 1: DIFFERENCE BETWEEN ABC AND TRADITIONAL COSTING 6APPENDIX 2: ACTIVITY-BASED COSTING : APPLICATION TO HIGHER EDUCATION 7APPENDIX 3: EXAMPLE ON INPLIMENTATION OF ABC 7BIBLIOGRAPHY 91. INTRODUCTIONTraditional costing system has been criticised for cost distortion and lack of relevance during the last 20 years (Johnson and Kaplan 1987). A new costing method, known as Activity Based Costing, was developed as a means of overcoming the systematic distortions of traditional costing systems.ABC was innovated 50 years ago, but its implementation started in the 1980s due to the intense global competition which led to decision errors due to poor cost information provided by the traditional costing system.Activity Based Costing (ABC) can be defined as "A method of measuring the cost and performance of activities and cost objects. Assigns cost to activities based on their use of resources and assigns cost to cost objects based on their use of activities. ABC recognises the casual relationship of cost drivers to activities." (Peter B. B. Turney)ABC has two main purposes. The first purpose is to prevent cost distortion and the second purpose is to minimize waste or non-value-adding activities by providing a process view.In the beginning ABC was mostly used by the manufacturing businesses. It was in the 1990s that the universities stated using the ABC system.Universities are a very complex business organisation with many processes and several layers of outputs. In many ways ABC is a natural solution for such complex organisations as universities, where there are a large number of small and diverse elements forming the...

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