The Limitation Of Activity Based Costing Accounting Essay

This survey investigated to place whether Activity Based Costing is still relevant in all geographical locations and we have to critically discourse about the subject. There are 4 states instance survey was investigated for this subject which are Belgium ( Milkcom Company ) , Netherland ( Panana ) , Australia ( DB Schenker AB ) and Sweden ( SCA Packaging Obbola ) . ABC usually has been used for many intents, such as product-range determinations, client profitableness analyses, cost decrease cost mold, budgeting, stock list rating, and public presentation measuring. Advocates of ABC claim that the technique helps to the efficient usage of resources and accordingly, to the decrease of costs. ABC besides helps companies alter their merchandise mix determinations and enables such companies to concentrate on profitable clients. Harmonizing to the Milkcom company, the company was successful in their concern because execution of ABC. ABC helps to continuously change the product-mix based on the public presentation of each merchandises. From the Panana Company, ABC was non appropriate for the company because it is a bike company from saturated market which is no existent monetary value competition exists. So the companies net income and cost computation is non based ABC public presentation. In add-on, DB Schenker AB companies ABC public presentation was non appropriate because it was non updated due the complexness, clip, resource committedness and the theoretical account is really efficient, but altering a complete accounting system is demanding as it affects the organisation as a whole. SCA Packaging Obbola ABC public presentation shows that ABC was non wholly implemented in the company. ABC non suited for the company because it includes altering a whole system and ABC focuses on top degree of the organisation because the cost information derived from ABC is used more in direction determinations. Overall, Activity based costing is still relevant in different states and implement the companies production costs. But in some companies it is appropriate to use in some states it is unappropriate to use.


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Activity Based Costing ( ABC ) was developed in the USA by Harvard Business School Professors Kaplan and Cooper and it is a procedure of separately naming and mensurating the cost of each activity lending to the production and bringing of a peculiar merchandise or service. Activity based costing is a affair of delegating fabricating overhead costs to merchandises in a logical mode than the traditional attack of apportioning costs on the footing of machine hours. Hence ABC provides a company with accurate cost information that helps the company to better its public presentation by placing the merchandises which are being unprofitable, unsuitably priced, and segmented in the incorrect markets. ABC lays in client ‘s demand of merchandises generates a company ‘s activities while a company consumes activities for the demanded merchandises. Through utilizing a cost system from an activity position a company can present high quality merchandises because it looks at how successfully a merchandise is delivered and serviced. Whether ABC still relevant in all geographical locations, which means ABC method is still apply by all states companies for their costing intent. These is because there might be some states merely utilizing the activity based costing system.

Literature Review

Restriction of Activity Based Costing

Given the benefits of ABC, one would anticipate its acceptance to be widespread, anterior surveies have found low acceptance rates amongst companies, both in the development and developed states. A recent survey by Innes et Al. ( 2000 ) , analyzing alterations in the execution rate of ABC over a five-year period, provided current tendencies in the usage of ABC in the UK. They found that between 1987 and 1994, ABC acceptance grew from 0 to 20 per cent, peculiarly among the UK ‘s largest companies. However, many of the ABC adoptive parents appear to be at the experimental phase, with high rates of rejection after the initial appraisal. Cotton et Al. ‘s ( 2003 ) survey of 299 hired comptrollers in New Zealand revealed that merely 20.3 per cent have adopted ABC. In Singapore, 13 per cent of the 106 companies surveyed said they used ABC ( Ghosh and Chan, 1996 ) . A more recent survey by Chan ( 2005 ) besides found the ABC acceptance rate of Singapore companies to be low ( 12 per cent ) . Studies in developing states indicate the same low acceptance rates every bit good. In Malaysia, while Abdul Rahman et Al. ( 1998 ) found a mere 4 per cent of their sample utilizing ABC, Sulaiman et Al. ( 2002 ) had 28 per cent of respondents bespeaking that they used ABC to apportion operating expenses. In India, merely 20 per cent of the 60 companies surveyed said they had adopted ABC ( Joshi, 2001 ) . China ‘s per centum was even lower ( Bromwich and Wang, 1991 ) . For Chinese state-owned endeavors, the per centum was 1 per cent. Amongst foreign houses and foreign partnered joint venture houses, ABC use was much higher at 15 per cent and 10 per cent, severally. A more recent survey by La et Al. ( 2005 ) reported a 20.7 per cent acceptance rate amongst Hong Kong logistics houses. There are assorted grounds as to why traditional direction accounting patterns are still widely used in developing states. These are the deficiency of consciousness of new techniques, the deficiency of expertness, possibly more significantly and the deficiency of top direction support.

MILKCOM ( Belgium )

Milkcom is the biggest manufacturer of milk pick in Belgium. Milkcom is a co-operative founded in 1963 by the Inco group and the federation of milk manufacturers. It has 6,700 providers and 900 people work in its production installations with an one-year turnover of $ 4 billion. In order to stay competitory, one of Milkcom ‘s first undertakings was to seek to obtain the ISO 9002 Certificate. So that ABC system was developed for Milkcom. The cost-system is to the full operational and it has been implemented along with the information system developed by Marcam. With this system the

direction is able to follow their production costs much better than with conventional cost systems. The computing machine system enabled Milkcom to hold, for each production line and for each type of merchandise, a measure of stuff and signals any alteration that occurs during the production procedure. Although the development and execution of the ABC system and the information system cost $ 2 million in 1993 and an extra $ 1 million in 1994, it has been worth it

harmonizing to the direction. In a growth and competitory market, it is indispensable to cognize precisely how much each merchandise type costs. This helps to continuously change the product-mix based on the public presentation of each merchandise. This is why Milkcom has proven to be successful.

PANANA ( Netherland )

Panana has been a well-known manufacturer of bikes since the beginning of the century. After a monolithic reorganisation when the company was taken over by Atag Holding ( manufacturer of ranges ) turnover increased from $ 300 million to $ 700 million in 1993. The company ‘s 300 employees produce yearly 220,000 bikes of 130 different types. The direction has decided that it was appropriate to develop an ABC system for their company. Soon, production costs are treated as a portion of an built-in cost accounting system which is based on back-flush costing. Operating expense costs are treated in two concluding cost pools which include production and gross revenues costs. All costs are assigned in proportion to the production volume. This implies that the costs are allocated based on traditional costing methods.

But ABC system is non appropriate for Panana because it requires enormous attempts to find the most appropriate cost drivers. In bend this needed a important sum of labour hours and incurs relevant costs. This investing may non be compensated for the benefits obtained by the execution of an ABC system. Panana has a basic thought of what one bike costs and this does non change for different bikes. A bike with big or little Surs costs.

about the same. Therefore, no expensive analyses are needed. A good communicating channel between the direction and the employees on the occupation is much more utile to happen out the information needed for the cost computation. Second, the market in which Panana is runing besides explains why ABC is inappropriate. Panana is working in a concentrated market wherein no existent monetary value competition exists, but competition is expressed in the signifier of offered quality goods and services. Therefore, specific cost computations utilizing ABC are of no significance in bettering the concern public presentation.

DB Schenker AB ( Australia )

Schenker & A ; Company was found in 1872 by Gottfried Schenker in Vienna, Australia. Around 34 145 employee in 130 different states is working in Schenker today. The Group reported entire grosss of about a‚¬ 18, 9 billion in 2010. Schenker is a land transit house that offers package services, land conveyances of full and portion tonss, less-than-truckload cargos, direct cargos, cold sped and fridge cargos. In Order, Schenker applied ABC as a undertaking to analyse how much disbursals went in executing certain order. First the company included one merchandise for eight months, the company discovered that the theoretical account provided them with positive consequences. Therefore, they added five more merchandises and so continued with the remainder. The company observes the theoretical account to be important in supplying them with information of how resources are consumed and how much disbursal goes to bring forth an end product. Despite the positive effects Schenker was sing from ABC, the theoretical account was non updated due the complexness, clip and resource committedness. The numerical information was considered to be disputing to convey in the right manner. Schenker Stockholm thinks that the theoretical account is really efficient, but altering a complete accounting system is demanding as it affects the organisation as a whole.

SCA Packaging Obbola AB ( Sweden )

SCA company created by Swedish moneyman called Ivar Kreuger and ain over 40 production units with more than 6 500 employees in Sweden. SCA produce, develop and market different assortments of merchandises such as personal attention merchandises, packaging, publication paper and solid-wood merchandises. In 1975 the company started to bring forth two chief merchandises Kraftliner and Euro power. The turnover in Obbola AB is estimated to 2 billion. Obbola AB applied ABC-project to place how much each measure in fabricating a merchandise cost. The intent of using the theoretical account was to place the most expensive stairss in order for the company to do necessary alterations. But, ABC was non wholly implemented in the company. Therefore, it was hard to reply whether it did or non. Still, Obbola chose non to implement the theoretical account. Obbola thinks their experience of ABC to be limited because the use of ABC lasted for short period of clip. It still enabled the company to see how much it cost. Last, ABC non suited for the company because it includes altering a whole system and ABC focuses on top degree of the organisation because the cost information derived from ABC is used more in direction determinations. The non being of a suited information system to register all the information from ABC and updating it invariably limits an unappropriate use of ABC. But Still, the theoretical account enabled the company to place the most profitable from unprofitable clients.


From the instance experiences discussed above, we can reason that ABC systems are non truly used much in some European states which include Belgium and The Netherlands. ABC systems trace more precisely the existent costs to the merchandises than any other volume-based cost systems. Therefore, more accurate operating expense cost allotments lead to fewer deformations. However, a tradeoff should happen between the economic benefits of an ABC and the costs of implementing it. For some industries ABC systems are utile and for others non as it can be seen from instance experiences. When implementing an ABC system, a alteration in the direction construction should happen in order to ease the application of ABC. The direction should accommodate an activity-based direction system utilizing the provided information by the ABC system and accomplishing their primary mark, which is doing net incomes. Furthermore, from DB Schenker AB and SCA Packaging Obbola AB instance survey of ABC experienced such benefits as good, but they did non go on to implement the theoretical account in their accounting system. This comes along with the restrictions of ABC and other organisational factors like opposition of implementing new cost accounting system. Example of these restrictions are the theoretical account being excessively expensive to construct, requires clip, resources and new manner of thought. In order for the staff to accept a new cognition, they have to understand the consequence of the theoretical account and this nonsubjective seems to be difficult to accomplish even in the user-companies of ABC. Furthermore, the companies need support from direction in such determinations because at the terminal the direction would do the alteration possible by providing staff with the cognition and resources required to implement the theoretical account.


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