Advantages Of Activity Based Costing Accounting Essay

Activity-based costing or what we usually said as ABC is a method to cipher the costs of merchandises and services of a company. ABC is calculated by capturing the activities involved in the production of merchandises and services. ABC is considered as a better and more effectual method than traditional cost accounting method in pull offing procedures and set uping resources of a company. This is because of traditional cost accounting system is apportioning the cost based on merely one of the measurings while ciphering the cost such as direct labour hr or machine hr. [ 1 ] ( Chung, H.M. and Khan, M.B. )

Advantages of Activity-Based Costing

Activity-based costing or ABC is complicated and pricey to transport yet there are still many companies taking to utilize ABC method because of its benefits or advantages. Nowadays, direct labor is replaced by the engineerings or machine, therefore the categorization and truth of border become harder to accomplish. As the consequence, indirect cost is going the bulk portion of the entire cost.

Second, the cost of merchandises is able to be accurately calculated by utilizing ABC method, companies can set a suited monetary value for their merchandise and will non confront jobs such as losing a command due to the monetary value of merchandise extremely set or confronting a lost due to puting a low monetary value which can non cover the cost of fabricating the merchandises.

Third, by utilizing ABC method, makers will cognize which merchandise is giving them the highest net income and therefore they will cognize which merchandise that they should concentrate in order to acquire the highest net income for their companies. . Manufacturers will besides cognize which merchandise is giving them the lowest net income or even a loss so that they can take the correct schemes to get the better of the job such as passing lesser clip and capital in such merchandises. Apart from that, makers can put a more suited monetary value and order size for their merchandises. [ 2 ] ( Horngren, C.T. , Gary, L. and Stratton, W.O. )

Disadvantages of Activity-Based Costing

Although ABC method is a better manner to cipher the cost than traditional method, nevertheless there are still some restrictions. One of the restrictions is allotment. The determination of ABC method can be impractical as non all costs have their suited cost drivers. Some of the costs should be allocated to other sections alternatively of fabricating section such as mill & A ; acirc ; ˆ™s insurance and belongings revenue enhancements.

Second, there are some costs which are non included in the determination of ABC method such as selling cost, research and development cost every bit good as advertisement cost. Following restriction is about the cost to implement ABC method. It is dearly-won to implement a new ABC system for those companies which are utilizing traditional costing method. Last but non least is about clip used to develop ABC system. In order to develop a new ABC system, it can be clip devouring as usually the clip taken for development and execution is one twelvemonth or even longer. [ 3 ] ( Beginning: Activity-Based Costing and Management )

Difference between Activity-Based Costing and Traditional Costing System

The first difference between ABC method and traditional cost accounting is knowledge in apportioning the activity and cost driver is required in ABC method but elaborate cognition in allotment is non required as lone entire operating expense cost and a really simple allotment regulation is required in traditional cost accounting. Another difference is a individual operating expense will be distributed otherwise among few merchandises as each merchandise uses different rate of operating expense in ABC method but the operating expense in traditional cost accounting is divided every bit among the few merchandises. The consequence of ABC method is more accurate compared to traditional cost accounting as it is close to the true cost of production. In term of cost of implementing, traditional cost accounting is cheaper compared to ABC method. [ 4 ] ( Schmidt, M. 2012 )

Is it still that despite the disadvantages and advantages?

ABC is a good tool in mensurating the cost of a merchandise but it still has its disadvantages. First of wholly, the cost allotment of ABC method is imperfect as non all the costs have their cost drivers as non all cost should be included in fabrication. I think that this job can be solved by merely taking out the cost that shouldn & A ; acirc ; ˆ™t be in fabrication section and reallocated the cost to the right section alternatively of fabrication section. There is besides some costs is non included when ciphering the cost of merchandises. Companies can take to add in the cost and divided among the merchandises so that they can acquire a more accurate cost. Even though the execution of ABC bing is clip devouring and dearly-won but many companies willing to implement it as they think that it is deserving to implement it. This is because ABC method can give out a cost that is more accurate. By holding an accurate cost, so merely direction can put a monetary value that is competitory plenty to vie with other rivals and yet still can hold net income. Besides that, they can besides enable direction degree to cognize which merchandise generate most net income and frailty versa so that they can bring forth more merchandises that gain most net income for company and make some advertizement for merchandise that is holding low gross revenues sum.

How Implementation of Activity-Based Costing of Case Studies:

A instance survey of a Thai telecommunication company had been carried out and harmonizing to this research, there are some factors that led to the success of the execution of ABC method in this company. First of wholly, top direction is in a really of import place toward this success. Top direction is holding the authorization or power to actuate his employees to take portion in the execution of ABC method. When the employees are taking portion in the execution, they will cognize more about ABC method and this will cut down their fright and eventually will take to the success. After employees decided to take portion in the execution of ABC method, adequate pattern and preparation should be given to the employees. Training shouldn & A ; acirc ; ˆ™t carry out by external advisers, the preparation can besides be carried out by top direction whom have this sort of cognition. Internal resource such as IT section is of import to the execution of ABC method every bit good. In order to acquire an accurate consequence, computation is really of import. Therefore, IT section is required to put up package for the employee to treat the information for cost computation. [ 5 ]

Second instance is a instance that taking topographic point in one Catalan Town Hall of Spain which is the lone town hall that had been successfully introduced ABC method. A study had been carried out to happen out what are the grounds of slow development of ABC method. Through this study, factors that affect the development are being known. The first factor is employee is scared of changed to ABC method. They are disquieted about that ABC method is being used as a monitoring tool that a cost computation system. This happens particularly among the senior employee. Therefore, to get the better of this job, higher direction degree demand to emphasize that ABC is a tool that usage to better the direction and it is non merely for supervising employee. Besides, politician seems to be non interested in Catalan Town Hall which will take to miss of resources that put in for development of ABC method or other cost accounting system. Following by deficiency of resources, there will be deficiency of experts in ABC method and eventually ABC method is failed to implement. [ 6 ] ( Bagur, L. , Boned, J.L. and Tayles, M. 2006 )

Another instance survey is taking topographic point in Jordan. Most of the Jordanian companies are utilizing ABC method alternatively of traditional bing method as information generated by traditional costing method is non plenty to back up the industry of Jordan. Besides the ground of truth, addition of types of cost and merchandises are grounds that contribute to companies in Jordan are traveling toward ABC method alternatively of traditional method. Employers and employees in Jordan are willing to alter and sufficient preparation is provided to employees, hence opposition from employees which normally happen in other states do non be here. Harmonizing to the research done, ABC method is being proved that it is successfully implementing in Jordan. ABC method is now a portion of day-to-day procedures for most of the companies in Jordan as they are happy with the computation and consequence of ABC method which is more accurate by utilizing its method of computation. [ 7 ] ( Sartorius, K. , Eitzen, C. and Kamala, P. 2011 )

The last instance survey is carried out in Bahrain. Although it is merely a little measure but there are still companies start to utilize ABC method. There are 2 factors that affect the companies in Bahrain start to utilize ABC method. The first ground is the directors or comptrollers are aliens that come from developed states and the 2nd ground will be employees that studied in developed states contribute the thought right after they joined the companies. The primary ground for implementing ABC method is about the cost. Companies will wish to command and put up a suited monetary value for their merchandises and remain competitory. Harmonizing to the research, the ground why most of Bahrain companies still utilizing traditional costing method is they are happy with the traditional costing method. Another ground is traditional bing method is their primary costing system used in the companies. [ 8 ] ( Nassar, M. , Morris, D. , Thomas, A. and Sangster, A. 2009 )


In decision, companies presents are traveling from traditional bing system to ABC methods easy, some apply both traditional and ABC method It is because every maker is viing with each other to acquire a higher market portion for their merchandises. Even though the execution of ABC is dearly-won and clip consuming but some companies that willing to pay is still will implement ABC method as this is a tool that can assist companies to accomplish their companies & A ; acirc ; ˆ™ mark, that is acquiring the highest market portion. Companies presents are cut downing workers and replacing by machinery hence indirect cost becomes the bulk of entire cost. Apart from that, ABC method enables companies to cognize the existent cost of merchandises therefore they can to the full use this information. For illustration, when there is command, companies can set at a lower monetary value as stamp monetary value which they can afford so that the per centum of acquiring the command is higher.


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