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

Activity Based Costing Essay

596 words - 3 pages

Activity-based Costing
Activity-based costing, is a system that follows a two-stage procedure to assign overhead costs to products. It identifies activities in a company and assigns the cost of each activity resource to all products and services according to the actual consumption by each. As revealed in the article, this costing method had both pros and cons. The article favored the advantages of the ABC method although the satisfaction scores were below the average for all tools used.
For those companies that disfavored ABC method, the most common complain was that it took too much money and time using this method, and the method might not capture the complexity of their operations. In fact, ABC method is not production-specified. For production costs, standard costing was still “kill of the hill” with a usage rate of 42% according to the article. However, it is inaccurate to say that ABC method is ...view middle of the document...

This is a good idea because using ABC method has larger benefits. ABC method greater supports decision-making processes than non-ABC methods do. Both the textbook and the article have stated that ABC method provides great value in financial, operational, and strategic decisions, as well as profitability analysis and planning process. The reason ABC method has significant value in those decision-making processes is that it traces overhead and activity costs to different products and services more accurately. The research in the article has supported this statement since only one in four non-ABC users agreed that the costs were traced accurately. And the true result was that less than 40% of non-ABC users received accurate costs of activities, while more than 70% of ABC users benefited from this method.
As mentioned above, ABC method provides more accurate allocation of activity costs, which is why it is more valuable. In ABC method, activity costs are accumulated into activity cost pools, which are allocated to products base on the real consumption as stated in the definition, while in equal allocation, activity cost is allocated equally to all products, and in output-based allocation, activity cost is allocated according to an output-related allocation base. However, having provided more accurately allocation, ABC method was only the second most popular method, whereas 60% of organizations used output-based allocation among those surveys.
In conclusion, although activity-based costing method requires more time and money, it provides more accurate information about the allocation of activity costs, and therefore provides greater value in decision-making within a company such as production decision and planning process. It is a good idea that the article suggested that more companies should consider using ABC method. The article believed that adoption of ABC might increase in the future since companies could choose to use mix allocation methods. Managers had a significant favor of ABC and would include some form of ABC method in their ideal costing systems.

Other Papers Like Activity Based Costing

Activity Based Costing Essay

1321 words - 6 pages Activity based costing (ABC) is a relative new way to allocate costs to specific processes and services. This system assures that the costs are accurately distributed to the products or services that generated them. ABC illustrates costs more accurately, giving management insight to the cost associated with certain business activities. ABC extends the decision-making skills of management by expanding on traditional costing (job order costing

Activity Based Costing Essay

1894 words - 8 pages ) Sustaining an Effective ABC-ABM System. Theoretical and Applied Economics , 18 (2), p.47-58. Cobb, I. et al. (1992) Activity-based Costing: problems in practice. London: CIMA. Cooper, R. and Kaplan , R. (1991) The Design of Cost Management Systems: Text, Cases and Readings. NJ: Prentice-Hall, p.370-380. Helberg, C. et al. (1994) Simulating Activity-based Costing. Industrial. Management & Data Systems,, 94 (9), p.3-10. Ittner, C. et al. (2002) The

Activity Based Costing

2864 words - 12 pages CHAPTER 5 ACTIVITY-BASED COSTING AND ACTIVITY-BASED MANAGEMENT TRUE/FALSE 1. Companies that undercost products will most likely lose market share. 2. When refining a costing system, a company should classify as many costs as possible as indirect costs. 3. Indirect labor and distribution costs would most likely be in the same activity-cost pool. 4. Activity-based costing helps identify various activities that explain why costs are

Activity Based Costing - 4650 words

4650 words - 19 pages Activity Based Costing 2.1 Traditional costing system Before going into detail on the activity based costing method, here is a brief presentation of the traditional costing system and say how it differs from ABC. The traditional costing system traces indirect costs to products/services through a single, or a few rates. Firstly, indirect expenses are assigned to production and service departments. After that, the costs from the service

Activity-Based Costing and Activity-Based Management

697 words - 3 pages Chapter 5. Activity-Based Costing and Activity-Based Management 5-16 1. a. unit-level b. batch-level c. unit-level d. batch-level e. product-sustaining f. unit-level g. facility-sustaining 5-17 1. Unit-level: a, b Batch-level: c Service-sustaining: d 2. HT $20.50 ST $12.33 5-18 1. SAD $28,132 AE $14,092 2. SAD $26,890 AE $16,090 5-19 1. UM $9,258 HM $216,020 LV $83,322 Total

Activity Based Costing In Service Industries

1708 words - 7 pages Activity-Based Costing in Service Industries ACC 560 Strayer University April 21, 2016 Amanda Bryan Activity-based costing is the method of accounting which analyzes and identifies all of the activities performed on a product during production. It then assigns an indirect cost to the product with avoidance of direct cost to the activity. This accounting method helps allocate the cost of the product to the less arbitrarily in values as

Activity Based Costing - 3544 words

3544 words - 15 pages "Costeo por actividad (ABC) es la cura perfecta para el problema de la asignación de gastos en las organizaciones." Esta afirmación demuestra la relación entre el costeo basado en actividades y el proceso de asignación de gastos. Costeo basado en actividades es simplemente un método de contabilidad que identifica todas las actividades y los costos asociados a estas actividades, sino que se asigna el costo asociado a la actividad directa de los

Activity Based Costing - 781 words

781 words - 4 pages Bangladesh University of Business & Technology (BUBT) Semester Final Examination Schedule Fall Semester, 2014-15 Campus-2 Date: Wednesday, January 21, 2015 |From 10.00A.M. - 12.00 Noon |From 12.30 PM – 2.30 P.M |From 3.00P.M -5.00 P.M | |Intake

Management Accounting

616 words - 3 pages ), practical applications Budgeting and budgetary control mechanism Activity based costing, Responsibility Accounting Target costing Objective Objective of this course is to help student understand: 1. The essence of management accounting-effective use of the accounting information for planning, control and business decision making. 2. To use cost accounting as a managerial tool for business strategy and implementation. 3. To understand

Accounting

1250 words - 5 pages = $ 301.06 per unit Question c: Absorption costing is the traditional cost accounting method that focuses on the product or service when fixing costs. It works under the simple approach of assigning resources to products or services directly. Activity based costing is a modern cost accounting approach that focuses on activities as the fundamental cost. ABC presumes that products or services consume activities, and activities

Management Accounting

1855 words - 8 pages largest manufacturers of flat screen televisions, mobile phones and computers. The company adopts the activity based costing system to respond to the various challenges the company had been facing. The ABC costing led AMM electronics to an enhanced efficiency and focus on the highest-value task. Through the implementation of this costing system, it helped the company provide value-added services to existing product line on actual cost incurred

Related Essays

Activity Based Costing Essay

971 words - 4 pages ACTIVITY-BASED COSTING 2 The use of Activity-Based Costing (ABC) in the manufacturing of automobiles can have a great benefit for tracking costs that are actually used in the process of manufacturing a certain type of auto. ABC has an impact in job costing when the process is complex and there are many machines or processes used in manufacturing (Activity Based Costing, n.d.). Using

Activity Based Costing Essay

523 words - 3 pages The Pros and Cons of Activity-Based Costing (ABC) Activity-based costing, rooted from the 1970ies, were a novel way of assigning costs more accurately to cost objects. As R. Cooper and R. S. Kaplan brought notice to these concepts, they stressed its main innovation: assigning the direct and indirect costs of each activity to products based on the resources they consume. In contrast, the traditional costing system assigned overheads in

Activity Based Costing Essay 2010 Words

2010 words - 9 pages costs or to charge more for costly products. To understand what is activity-based costing, we look at two products in a company. Product “X” is a low volume item which involves special engineering, additional testing and more machine setups, at small quantities. Product “Y” is a high volume and requires little attention and no special activities. If this company used traditional costing, it might allocate all its overhead to products based on

Activity Based Costing Essay 2201 Words

2201 words - 9 pages firm and the long-term viability of a firm. Effective cost allocation can provide a competitive edge to an organization in globalized and competitive nature of current business environment. Keywords: Traditional cost allocation method, activity based costing (ABC) COST ALLOCATION AND ACTIVITY BASED COSTING PRACTICES 3 Cost Allocation and Activity Based Costing Practices Cost allocation techniques