Activity based costing and problems it could solve

Activity based costing is a direction accounting technique that deals with assignment of the operating expense costs in a more logical mode as compared to the traditional attack that trades with merely apportioning the costs based on the machine hours. This attack is based on delegating the costs foremost to their related activities and so eventually delegating the costs of those activities to the merchandises that lone demand these activities. Activity based costing recognizes that the machine apparatus, particular testing, and particular technology all cause a company to devour resources. This is the ground as to why this technique calculates the cost of these resources and so delegate them to the merchandises that demanded the activities ( Accounting Coach, 2004 ) .

As the environment of the fabrication house moves from a manual system to a computer-integrated fabrication there is the outgrowth of conventional cost systems that may let go of study of deformed merchandises. Therefore, activity based costing will salvage this job by roll uping fiscal and operational public presentation by executing the activity of following the important activities of the operation to their concluding merchandises more efficaciously. Activity based costing will execute the undermentioned activities in cost direction ; placing the activity centres, choosing the first cost drivers, and describing the cost activities. After this there follows the procedure of execution that ensures corrects use of the technique in cost direction ( Klener and No, 1997 ) .

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Activity Based Costing can back up the directors in seeking to see how to maximise the stockholders value and besides better the general corporate administration. It started its map after conveying in more advantages as compared to the traditional manner of accounting. In the traditional manner of accounting, it was believed that the high volume clients mean high degree of net incomes. But this is non the instance of determination doing on activity based costing. ABC theoretical account came with a new version which based determination devising by directors on placing the cost pools in an organisation and so delegating the cost drivers i.e. services by sing the figure of events or minutess that are involved in the procedure of bring forthing a peculiar merchandise ( Value Based Management.net, 2010 )

In any peculiar company, the cost functioning a client can be determined separately establishing on the costing activities. This can be done by subtracting the merchandise cost and besides the cost of functioning each client in order to get at the productiveness. By making this one can be able to place the profitableness of each client and hence place the merchandises and services consequently. This is a practical application of this type of theoretical account when covering with costs. In add-on to that, the ABC theoretical account helps to do the employees to understand the assorted types of costs involved. It besides the helps them analyze the cost, value added and non-value added activities and therefore enabling them to recognize the benefits accrued from the merchandises and services produced ( Value Based Management.net, 2010 ) .

In cost direction and determination devising, Activity Based Costing has besides an extension known as the Activity Based Management that to the full touches all facets of direction costing. This allows the direction to analyze the non-value-added activities and therefore do rational determinations on them. This technique in ABC theoretical account relies on the ABC system in stipulating where the non-value-added activities exist and therefore supply the value and sum of pecuniary benefits that are associated with their riddance. The other side of the valueaa‚¬ ” added costing is to the full dealt with in the full theoretical account Activity Based ( ABC ) Model ( Dunn, 2004, p.2 ) .

Activity Based Costing has been adopted by many states in different sectors around the universe. Different sectors in the universe economic systems have been modified and hence their cost direction techniques simplified by the usage of this theoretical account. For illustration, sectors of the economic system such as the fabrication industry, banking industry, retail industry, and even the authorities have a absolutely implemented ABC theoretical account in their direction costing.

Japan provides a much more experimental instance survey for our treatment. There was a great impact of the inventions of the cost accounting technique, fundamentally ABC, on the engineering trigger ( an external drift that stimulates invention ) between the old ages 1984-1997. This was peculiarly applied on both the electronic and automotive sector. In the yesteryear it was believed that, the causes of low pay labour and undervalued currencies were the advanced direction patterns, just-in-time stuff flow of systems, statistical procedure control and uninterrupted betterment. There was besides the issue of unjust competition and acceptance of inappropriate direction patterns from other companies ( Accounting Coach, 2004 ) .

As a consequence of this, there was the outgrowth of new bing attacks in several fabrication industries including the automotive industry. This was after the realisation that the cost accounting systems used at that clip were associated with negative operational and strategic effects. For illustration, the Tektronix Company started apportioning manufactured operating expenses to the particular merchandises based on the direct labour. This encouraged the applied scientists to plan merchandises that required less labour to fabricate as compared to the past old ages. This method provided the applied scientists with a much cheaper manner of doing determinations ( Turney, 2008, p.3 ) . The riddance of the behavioural deformation that was built-in in the used cost accounting system helped the Tektronix Company to vie.

Another sector where the ABC method was implemented and used is the concern sector and offering of fiscal services. With most engineerings, the development of the first coevals methods encouraged the development of the ABC market. A big figure of confer withing houses started constructing up the ABC patterns in the late 1980aa‚¬a„?s and early 1990aa‚¬a„?s with an debut of the first commercially available ABC package. By the innovation of this method, there was an addition in the degree of profitableness ratio by these consultancy houses. This was because ABC acted as a accelerator for determination devising that is impacting the profitableness degree and was able to uncover beginnings of the loss that were responsible for the diminution of the profitableness degree ( Liu and Pan, 2007 ) . The method helped the consultancy houses to develop new focal point on the profitable markets and clients, design merchandises to take cost, and extinguish the non-value added activities.

Activity Based Costing is being used by a figure of companies in different sectors of the economic system. For illustration, in the health care industry activity based costing has provided an easier manner of covering issues sing the proviso of wellness services and merchandises to its citizens. Most of the infirmaries like Al Mowasat Hospital, Armed Force Hospital and King Faisal Hospital have benefited so much from the technique of activity based cost direction ( ABM ) systems ( Aird, 1988 ) . This has enabled the infirmaries to better their quality and efficiency in healthcare service proviso with consideration of the cost controls and resource direction.

Another sector that has expressed much use of the ABC method in Saudi Arabia is the Oil Industry. The oil industry is faced with a high degree of competition associated with higher costs. Therefore to be able to last in this market, a house needs to pull off cost, quality, and merchandise or service through an effectual cost direction method. Saudi Arabian Oil Company is one of the of the crude oil companies that has a huge crude oil militias that is unmatched in any portion of the universe. For the company to last in the competitory oil market it uses a figure of systems for cost control such as, design for fabrication, quality direction and most significantly activity based costing as one of its nucleus positions ( Galbraith et Al, 1998 ) .

Activity Based Costing has provided a new attack in work outing cost direction jobs in many industries in Germany. For illustration, Market-Trading is a German endeavor that sells chiefly high quality and extremely equipped merchandises to the retail merchants, whole Sellerss and even retail merchants. This company has implemented the theoretical account of Activity Based Costing that attempts to apportion the costs to the related concluding merchandises before let go ofing them off to the market. Through this method at that place has been an increased competitory advantage gained by the house in the market of competition. This is the sector of concern trading covering with proviso of goods and services. In the building industry, there has been experienced more use of the ABC method by many houses. For illustration, the EU Solar Systems Limited brings together a alone squad of Fieldss of building, gross revenues, information engineering and technology. Their chief merchandises include distribution of solar panels and related solar merchandises. Due to the high degree of costs incurred in this production procedure, the EU solar company manages its costs by utilizing a well defined cost accounting system fundamentally the ABC theoretical account ( Polejewski, 1990, p.4 ) .

There are a figure of issues directors in an emerging economic system face when seeking to implement the ABC method in a house. One of the major issues that surround the ABC method is the trouble of execution. What proves hard is the issue of allotment of belongings. This is because it requires a batch of attempt public-service corporation and that the procedures are adequately mapped throughout the organisation. In the emerging economic systems where there is unequal public-service corporation attempt implementing the ABC theoretical account is likely to be more cumbrous. In add-on to that, most of the emerging economic systems lack an appropriate manner of nearing the execution. Apologizing installations, placing the chances and so gestating proper solutions are a challenge to these economic systems due to miss of skilled work force in the direction degree ( RCG University, 1999 ) .

Activity Based Costing makes a batch of sense to companies that produce a varied scope of merchandises or services and those that are enduring from inaccurate bing information. For these companies the issue of execution is non such a large challenge, this is because the attempt that is required to successfully implement ABC is worth their resources. The emerging economic systems largely lack big companies that offer multiple merchandises, therefore the cost of implementing the ABC theoretical account is truly a challenge to a director of that company.

Businesss are viing in an ever-changing competitory Earth. Therefore companies are supposed to to the full implement and use the ABC system in order to go more productive, efficient and profitable and hence earn a competitory advantage over other companies. This means that there is demand for careful analysis done by directors before switching into new methods and techniques of determination devising. Therefore, an extra investing should be put aside for proper analysis of the different types of cost techniques ( Klener and No, 1997 ) . These extra costs are a challenge to the directors of houses in an emerging economic system due to limited figure of resources.

There are many challenges that a director can confront when seeking to implement the ABC theoretical account in the emerging economic systems. First there are challenges in seeking to plan and construct a theoretical account. This challenge is more rampant in the development economic systems due to miss of equal resources available for a house to be in a place of implementing the theoretical account with less cost load. Updating and keeping the theoretical account requires an extra investing or cost to the little companies. Gathering and incorporating informations requires a higher degree of skilled forces that is at a lower degree as compared to the stable economic systems ( Galbraith et Al, 1998 ) . Finally, describing and circulating the integrated informations, analysing it and coming out with relevant determinations son cost direction is besides another challenge to most houses.

ABC theoretical account has been implemented over clip by many companies that experience lifting degree of costs. Their chief purpose is to cut down costs and increase the degree of productiveness. However, due to some grounds some companies have reported successful execution while others have reported jobs with execution of the systems or have rejected them. This difference occurs due to a figure of varied grounds ( Klener and No, 1997 ) .

Some companies that report positive feedback on the execution of the ABC theoretical account province that some of their existing tools allow for a much quicker development of such cost direction theoretical accounts. This ability comes from the quality of modern tools and the acquisition curve. This differs greatly through different industries. For those houses that have old-fashioned engineering are seen to confront much rejection towards execution of the ABC theoretical account ( Liu and Pan, 2007 ) . An illustration of the modern engineering that most up-to day of the month houses use when implementing new cost direction methods is the ABC package which is a specialised tool for the ABC method.

For the ABC technique to hold an impact on a companyaa‚¬a„?s cost direction there is demand of apportioning clip for it to be successfully implemented. Most companies allow a long continuance of clip for credence and apprehension because of the associated their long acquisition curves. This may take to a higher accretion of costs as a consequence of the pooled up costs associated with the execution of the cost direction technique. It is besides understood that alterations is non something that something that people readily accept. A company will be willing to let its aims to turn as their apprehension of the cost direction technique that had been implemented in that peculiar organisation ( Klener and No, 1997 ) . This evidently differs from one company to another therefore conveying about a difference in their execution manners.

Execution of the ABC method into a company system requires that the company to which this system is to be implemented to hold the needed resources and capacity to be able to suit the system. Companies with equal sum of resources are at a higher chance of suiting the alterations brought approximately by the new implemented cost direction theoretical account. This is because the equal resources can back up the extra costs that are required for successful execution of the theoretical account. On the other manus, companies with lower sum of resources or capital base will take a long continuance of clip to implement the system or they might describe failure in the execution procedure. This is because ; the new system will look to be an extra cost towards the company which may non be accommodated by many little houses ( Liu and Pan, 2007 ) .

For the success of a company in implementing the ABC theoretical account, there must be the top direction perfect engagement. For a company that has top direction support provides an chance for the success of the execution of the ABC theoretical account. The corporate civilization of the top-to-down direction in the abetment of the acceptance of the direction inventions will find the success of the effectual cost direction. For illustration due to the hierarchal nature of the organisation and taking into consideration of high proportion of dedicated professionals determines the success of the execution of the ABC system within the organisation ( Liu and Pan, 2007 ) .

Firms that report success in the execution of the ABC theoretical account means that the theoretical account is applicable in their houses. On the other manus, for those that report failure show that the theoretical account is non applicable for their cost direction systems. For illustration, houses that have multiple service and merchandise proviso are at a higher chance of accepting this theoretical account than houses with limited or one line of service and merchandise proviso ( Dunn, 2004, p.4 ) . Therefore, execution of the ABC theoretical account besides goes manus in manus with the pertinence of the theoretical account in the company.

In general, activity based bing method is good to houses that want to increase their profitableness degree above the normal degree and for those that want to pull off the merchandise associated costs more efficaciously. From the essay we have seen how this theoretical account has been widely used and accepted by houses in different states and how it has assisted in proper cost direction. However, for the house to successfully utilize the theoretical account there is demand for proper execution procedure that assures the company of perfect public-service corporation of the technique. For the houses that have successfully implemented the ABC theoretical account they enjoy decreased costs, higher net income degrees and better direction of the merchandise associated costs. Therefore, ABC is seen to be both a cost-increasing factor and a cost-reducing factor. But the benefits that arise from the theoretical account are far much higher such that the costs of implementing the theoretical account are non felt.

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