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Activity Based Costing In Government Essay

2529 words - 10 pages

DATE \@ "M/d/yyyy" 12/2/2007
Activity-Based CostingInGovernmentTable of ContentsExecutive SummaryActivity-Based Cost (ABC) ManagementWhat is ABC?Traditional Cost Systems vs. ABCStrengths and Weaknesses of ABCABC Usage In Government AgenciesA Real Life Example: Texas State GovernmentConclusion / RecommendationsAppendixReferencesExecutive SummaryActivity-Based Cost management is one of the most important methodologies in the managerial accounting for data analysis and decision making. ABC can help both public and private organizations improve their cost structure, and it carries a vital role for these organizations to understand their cost behavior. This paper addresses what basically ABC intended to do, its strengths and weaknesses, and describes successful applications of ABC in the public sector, which includes a real life example. There will be recommendations section at the end upon improving the performance throughout an organization.II. Activity-Based Cost ManagementWhat is ABC?In the rapidly developing and globalizing world, markets become much intense than before, therefore, organizations started to seek for methods where they can do more with less. The successful companies not only compete against domestic competitors, but also the companies over the world. For example, after China entered into World Trade Organization, they opened their domestic market for the western companies in different industries such as car manufacturing, farm products and so on. Due to the product enrichment, the customers in China have more options than ever, and they started to seek to find the high quality goods. In order to compete in such competitive business environment, companies became more customer-driven, therefore, their costs increased.The above situation is not only faced 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 the ongoing processes in an organization. In other words, costs are charged to processes or products based on the amount of each activity within that process, therefore, it's understood that products or services which may seem similar in terms of profits can be actually quite different. As a result of ABC implementation, the full cost of a service now covers all direct and indirect costs that are related to that service. Direct costs may include wages, salaries, and benefits of the employees who are working to produce that service, as well as the materials and/or supplies used. "The agents that cause activities to happen are called cost drivers." Indirect costs may include Shared Administrative Expenses, support functions and so on. The...

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