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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.

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