Harmonizing to Baker ( 1998 ) , ABC is a methodological analysis that measures the cost and public presentation of activities, resources, and cost objects. Resources are assigned to activities and so activities are assigned to be objects based on their usage. Chea ( 2011 ) indicates that construct of ABC was introduced by Robert Cooper and Robert Kaplan in the fabrication sector in United State of America during 1970s and 1980s. They brought the ABC construct to the publishing house and the organic structure of cognition was published in the Harvard Business Review in 1988. Cooper and Kaplan defined ABC method is an attack to work out the jobs of traditional cost direction systems that the conventional cost accounting systems are unable to place right the existent costs of procedures. Hence, directions are unable to do determinations based on the misrepresented information.
There are some outstanding characteristics of ABC. ABC is an activity based system ( Rajasekaran, 2011 ) . Activities consist of different undertakings that are associated with cost objects. Those activities involved in fabrication sector are set up machines, fix and keep machines and merchandises bringings, and in service sector are bringings and serving. Cost pools are established ( Rajasekaran, 2011 ) . Overhead costs like supervisors ‘ wages, rental and public-service corporations are identified to activities and assigned to each activity cost pool consequently. Cost drivers are being used ( Rajasekaran, 2011 ) . These are the causes of overhead happenings. They are used to delegate costs to merchandises or services.
Beside that, accretions of operating expense costs are done based on assorted activities ( Rajasekaran, 2011 ) . There is no cover rate applied. Overheads costs are more accurate and appropriate. Overhead costs can be traced easy with the ABC system ( Rajasekaran, 2011 ) . Hence, the informations are more accurate and dependable. Eliminations of non-value-added activities make the production costs lesser ( Rajasekaran, 2011 ) . Non-related activities are non added to the value of the merchandises. Operating expense costs are charged proportionately based on the cost-driving activities to different merchandises ( Rajasekaran, 2011 ) . This leads to sensible operating expense costs soaking up.
Drury ( 2008 ) states a two-stage procedure is being used in ABC system and traditional costing system. In the first phase, an ABC system traces costs to activities cost pools such as telling stuffs and piecing merchandises instead than sections whereas a traditional system allocates overhead costs to production and service sections and so costs of service section to be relocated to production section ( Drury, 2008 ) . In the 2nd phase, an ABC system assigns costs to merchandises by utilizing many different cost drivers including non-volume-based drivers such as figure of production tallies and figure of purchase orders whereas a traditional system assigns costs to merchandises by utilizing overhead allotment rate which vary straight with the production volume ( Drury, 2008 ) .
Harmonizing to Drury ( 2008 ) , there are four stairss to implementing the ABC system. Step one is indentifying the activities in an organisation. Step two is roll uping costs to be pools for each activity. Step three is finding appropriate cost drivers to each activity. Step four is delegating the cost of activities to merchandises based on the merchandises ‘ demand for activities.
There are some advantages of ABC. ABC is a more accurate merchandise costing ( Crowther, 2004 ) . More overhead costs can be traced to merchandises costs and provides a more realistic appraisal of how costs are incurred. It leads to more realistic merchandise bing particularly in a fabrication environment where support costs comprise a high proportion of entire costs. Control of costs can be improved by utilizing ABC ( Crowther, 2004 ) . The activities which cause costs are recognised and hence attendings on the existent nature of cost behaviors are focused. It provides chances to command costs and lead to better usage of managerial clip.
On the other manus, production costs can be reduced in ABC system due to riddance of non-value-added activities ( Crowther, 2004 ) . ABC recognises the value added by the assorted activities in the production procedure by comparing costs with benefits and therefore non-value-added activities are eliminated. It leads workers are able to concentrate their attempts on the value-added activities. ABC helps the directors to do strategic determinations on pricing, investing, merchandise mix and client mix with sufficient information ( Crowther, 2004 ) . Every determination in an organisation will impact the accomplishment of run intoing organisation ‘s ends. Hence, right determination devisings play of import functions.
However, ABC besides has some disadvantages compared with traditional costing system. ABC is dearly-won to implement ( Crowther, 2004 ) . For illustration, employees need to pass clip out from their day-to-day activities to place important activities and hence extra costs or staffs are required. The costs incurred by history section will be increased as delegating costs to merchandises requires a batch of times in the section. ABC is a more complex system of soaking up costing ( Bendrey et al. , 2003 ) . Absorption rates for each cost driver are required and a greater figure of single cost rates are required to be computed under ABC in order to retrieve the costs for each cost pool. More elaborate analysis of cost pools and cost drivers are required. It is a more complexness for a big company.
Furthermore, the benefits may non outweigh the costs for companies with homogenous merchandises ( Heisinger, 2010 ) . These companies require really small fluctuation in production addition small from an ABC system. The overhead costs can be divided into many cost pools but all overhead costs will be assigned to the homogenous merchandises. ABC may misdirect unitising fixed costs ( Heisinger, 2010 ) . Fixed costs such as supervisors ‘ wages and depreciation on edifice and machinery are frequently a major portion of the operating expense costs being allocated to merchandise cost. Fixed costs will be attributed to more merchandise units and so cut down the merchandise cost per unit. It is hard to apportion on a suited footing. Hence, directors must non merely do determinations based on the merchandise unit cost information particularly if a important alteration in the production degree.
Despite its disadvantages, is ABC still relevant? Stratton et Al. ( 2009 ) reported ABC continues to supply organisations important value for operational and strategic determination supports. The survey shows many companies are still utilizing ABC as it is allocated across the internal value concatenation and provides accurate overhead allotments and information on activity costs to directors on analyzing merchandises or services profitableness. The survey besides shows ABC is besides better integrated into budget and planning procedures. Harmonizing to Elhamma ( 2012 ) , ABC brings important and positive influences to big organisations but it brings undistinguished effects to little and average endeavors. The survey shows ABC users considered the system helps bettering in fight, profitableness and productiveness more than traditional costing system in overall. However, based on the survey, merely 12.9 % of 62 reacting companies had implemented ABC system despite its popularity.
Khozein et Al. ( 2011 ) stated ABC brings advantages for the users but deficiency of cognition on implementing ABC system causes waste of fiscal and human beginnings in an organisation. Five major factors impacting launching and implementing ABC were found and ranked in the survey ; there are organisational, managerial, environmental, single and proficient factors. The research workers concluded that organisation can bask the benefits of ABC system by holding consciousness of the major factors and get the better ofing them, the organisation value would be added. Harmonizing to Chea ( 2011 ) , ABC is more suited for service organisations such as accounting house and legal house, the health care industry and authorities organisations compared to fabricating sector. The costs are decently easier to follow to different activities in service organisations as the figure of activities involved are much lesser than fabrication sector. ABC is a simple term may supply really good payback for service organisations.
Furthermore, Berts and Kock ( 1995 ) stated that ABC is an effectual tool in service houses, and it is a helpful tool in order for promoting directions to analyze the activities and find the organisation value to the clients. The writers documented successful execution of ABC will assist the service houses making profitableness through satisfied clients, and the direction must non pass all their clip on cost computations but must ever concentrate on the client ‘s demands and wants and entire sensed service quality. Harmonizing to Kaszubski and Ebben ( 2004 ) , ABC provides information tracking and sharing, and job work outing to organisations. The writers besides stated ABC is a solution of installations groups to look at their current service bringing theoretical accounts and construct enterprises such as cut down cost and increase efficiency.