...the traditional cost accounting system is closely linked to its general ledger system. This in particular has to do with cost allocation. Mostly, costs are accounted either for valuation (i.e., financial statements analysis) or decision-making activities (i.e., internal purpose) or both. Meanwhile, sometimes the costs are accounted for reimbursement purposes (e.g., corporate health insurance, corporate travel). The traditional approach to cost-allocation manages three sequence of actions: a) Accumulate and account costs within a production or nonproduction business area, b) Allocate nonproduction business area costs to production business area, and c) Allocate the resulting (revised) production costs to various products, services, or customers. Costs hence derived using traditional allocation approach suffers from some defects that can result in incorrect costs for decision-making purposes. For example, the traditional approach attributes the cost of idle position to systems. Accordingly, such costs are recharged to entities that did not use it. In order to find solution to such anomalies, many organisations have adopted a separate cost-allocation methodology called Activity Based Costing (ABC). WHAT IS ACTIVITY BASED COSTING? In contrast to traditional cost-accounting framework, ABC framework first accumulate overhead costs for each organizational activity, and then assign the costs of the activities to the products, services, or customers (cost objects) causing...
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...the Eye of the Beholder Abstract The literature on Activity Based Costing (ABC) tends to define the ‘success’ of an ABC system in relation to the decision-making and strategy formulating opportunities it provides based on the ‘logic’ or technical attributes of ABC (Shields, 1995; Malmi, 1997). This paper argues that there is a logic of ABC and tries to identify and illustrate how people relate to, misunderstand and still ‘appropriate’ this logic and start “talking accounting”. This paper shows that the ABC system implemented in this organisation did indeed provide information for decision-making and did to some extent support the logic of ABC. The paper also shows how this knowledge was emergent, the logic was articulated, but not fully understood and it was only when the system was implemented that many attributes of the system were recognised and, in some cases misunderstood. The paper argues that the ‘success’ of this particular ABC system was dependent on the organisational context, and the changing context as well as the logic. This is reflected in the change in attitudes, awareness and understanding of costs in the department where it was implemented. Key words: Activity Based Costing, financial services, and organisational change. 2 Introduction This paper examines the introduction of an Activity Based Costing (ABC) system in a UK Clearing Bank. The development and implementation of the ABC system is traced...
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...Activity-based costing (ABC) is a costing methodology that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each. This model assigns more indirect costs (overhead) into direct costs compared to conventional costing. CIMA (Chartered Institute of Management Accountants) defines ABC as an approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs. Resources are assigned to activities, and activities to cost objects based on consumption estimates. The latter utilize cost drivers to attach activity costs to outputs. Aims of model With ABC, a company can soundly estimate the cost elements of entire products ACTIVITIES and services. That may help inform a company's decision to either: * Identify and eliminate those products and services that are unprofitable and lower the prices of those that are overpriced (product and service portfolio aim) * Or identify and eliminate production or service processes that are ineffective and allocate processing concepts that lead to the very same product at a better yield (process re-engineering aim). In a business organization, the ABC methodology assigns an organization's resource costs through activities to the products and services provided to its customers. ABC is generally used as a tool for understanding product and customer cost and profitability based...
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...costing system and Activities Based Costing (ABC) system. The advantages and disadvantages of both concepts determine which method is more superior for the business. Traditional costing concepts Traditional costing is to consider how much will cost to produce a product. It plays an important role in the business to predicting the profitability of a product. Traditional costing is also well known as the conversional method costing, which refers to the allocation of manufacturing overhead costs to the product manufactured (Harold, n.d.). Traditional costing assigns manufacturing overhead on the basis of volume of a cost driver, such as direct labor hours, production machine hours or direct material hours, all of which are needed to produce an item and the number of units produced. Different from activity- based costing, traditional costing is emphasis on costing information of external financial report in the business, because it provides the value of cost of goods sold. Many manufacturing companies use traditional costing system in order to divide the total cost of a product by the direct labor cost. Generally, the traditional costing method users make the assumption that the volume metric is the underlying driver of manufacturing overhead cost. Hence, under traditional costing method, accountants regard manufacturing costs only to product. Whereas, some cost such as administrative expenses are allocated as non-manufacturing cost and they are also associated with product of...
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...segment of the service sector—banks—needs accurate cost information to make strategic decisions, and how more refined accounting systems help fulfill this need. Buckeye National Bank is a hypothetical bank that has suffered falling profits despite a shift in customer base toward retail customers, which the current information system reports are more profitable than business customers. Following a step-by-step approach, you will develop the Bank’s average cost of serving a retail customer account and a business customer account, under (1) the Bank’s traditional single allocation base system, and (2) a (pilot test) activity-based costing system. You will analyze these results to determine how and why costs reported by the activity-based system differ from the costs reported by the traditional system, and what this difference means for the Bank’s business strategy. Finally, you will consider how the Bank’s managers can use the new, more refined activity-based cost data in strategic decision making, including controlling costs and developing more profitable business strategies. TEACHING NOTES Background and Purpose Textbook illustrations and pedagogical cases on activity-based costing (ABC) typically focus on manufacturing applications.[1] However, the U.S. Bureau of the Census projects approximately 74 percent of the workforce will be employed in the service sector by 2006 (U.S. Bureau of the Census 1999). Furthermore, ABC and customer costing are increasingly popular...
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...Source: http://www.allbusiness.com/accounting-reporting/methods-standards-cost-accounting/498244-1.html#ixzz1nMWBS5qI By Juras, Paul E. ABSTRACT Descriptions of activity-based-costing (ABC) systems have become a standard part of managerial accounting texts. While ABC implementation issues are the focus of a number of articles, these issues are often not addressed in a typical textbook. This case is designed to familiarize you with the behavioral and technical variables that can aid or impede successful ABC implementation. Anderson's (1995) factor-stage model provides a template to organize the discussion of ABC success factors. In this case, you will be cast in the role of a business consultant. You are asked to synthesize the case study's key "change management" insights into a report that could be shared with co-workers in an intranet-based knowledge management system. In addition, you may be expected to prepare a formal presentation of the report for your peers. Implementing change in an organization is about ninety percent cultural and ten percent technical. This is because the organization dynamics, politics, and search for a champion that go on are the real issues that make or break the project. One of the reasons we were able to implement ABC successfully was because the right people became champions. Chris Richards, Director of MIS, Global Electronics, Inc. BACKGROUND Global Electronics, Inc. (GEI), headquartered in Sarasota, Florida, designs, manufactures...
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...system was viewed as a method of accounting that used various techniques to assign costs to particular cost objectives, e.g. the cost to perform an activity, produce a product or render a service. W.B. Lawrence stressed the importance of accountants becoming familiar with cost accounting in his 1930 text because even then, “the modern factory occupies more space and employs many more workers than did the factory of a generation ago”. In 1940, John Blocker recommended in his text additional uses for cost accounting in other industries, such as construction, mining, utilities and nonprofit organizations. He believed that all of these businesses needed to consider that the costing in different departments within a company could be controlled through cost accounting. Even in the 1960’s accountants and system designers developed cost accounting to do more than measure performance. Cost accounting was an integral part of planning and control in businesses. After that, the concept of activity-based costing (ABC) was introduced in the US, initially in the manufacturing sector during 1970s and 1980s. Robert Cooper and Robert Kaplan brought the ABC concept to light and published the body of knowledge in the Harvard Business Review in 1988. Cooper and Kaplan defined ABC method as an approach to solve the problems of traditional cost management systems; that is, the conventional cost accounting systems are often unable to identify correctly the true costs of processes. Consequently,...
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...The implementation of Activity Based Costing (ABC) in Chinese refining manufacturers Table of contents 1. Introduction 2 1.1 Research background 2 1.2 domestic and foreign research status 4 1.2.1 Activity-based costing development process 4 1.2.2 Status quo of Activity-Based Costing Development and Application in China 6 1.3 research contents 8 2. Related theories 9 2.1concept of ABC 9 2.2 rationales 10 2.3 difference between ABC and traditional costing 12 2.3.1. Different calculating targets 12 2.3.2 Different calculation 12 2.3.3. Different Finished goods costs term 13 3. Research methodology 13 3.1 case study 13 3.2 The survey method 13 3.3 Literature 14 4. Research Results 14 4.1 problems of traditional costing method in oil refining enterprise 14 4.2suggestions for Chinese enterprises’ application ABC 15 Bibliography 15 1. Introduction 1.1 Research background With the rapid development of the national economy, enterprises’ competition is increasingly fierce; many companies are using advanced science and technology to achieve competitive advantage in the market. Market competition and technological progress are the two fundamental economic factors which generate activity-based costing. Since The beginning of 1980s of the 20th century, the activity based cost method is paid a wide range of attention; the developed countries gradually adopt it in a number of advanced enterprises...
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...Change...It'll Do You Good Change…It’ll Do You Good A Recommendation for Implementation of Activity-based Costing Joann Harper BU264: Managerial Accounting, Spring 2011 Dr. Henry Bryan April 13, 2011 Outline I. Introduction A. Comparison of traditional costing vs. activity-based costing B. Pros and cons of activity-based costing C. 4 companies selected for review i. General Electric ii. Dennison Manufacturing Co. iii. South-western Ohio Steel Inc. iv. Insurance companies D. Thesis Statement: An examination of four companies that have successfully implemented activity-based costing/activity-based management has led to my recommendation that transitioning to activity-based costing is the right move for our company. Although there are many benefits to activity-based costing, we would directly benefit from the relative ease of implementation for a company our size, the ability to view our product costs differently and target process improvements which in turn will lead to an improved line of products and allow us to be more competitive in our market niche. II. General Electric A. A brief history of activity-based costing B. Outcome of General Electric and activity-based costing III. Dennison Manufacturing A. How Dennison Manufacturing uses activity-based costing B. Outcome of Dennison Manufacturing’s...
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...200 000 hours Activity (Cost Driver) | Budgeted Costs for 2010 | Cost Driver Used as Allocation Based | Cost Allocation Rate | Material Handling | $ 325 000 | Number of parts used | $ 0.25 per part | Cutting & Lathe Work | $ 2 340 000 | Number of parts used | $ 1.80 per part | Assembly & Inspection | $ 5 000 000 | Direct labor hours | $ 25.00 per hour | Units Produced | Direct Materials Costs | Number of Parts Used | Direct Labor Hours | 3 800 | $ 142 000 | 83 600 | 17 180 | Question a: ABC Costing Activity | Total Time | Cost-Driver Rate | Total Cost | Material Handling | 83 600 | $ 0.25 | $ 20 900 | Cutting & Lathe Work | 83 600 | $ 1.80 | $ 150 480 | Assembly & Inspection | 17 180 | $ 25.00 | $ 429 500 | Total | | | $ 600 880 | Direct Labor Cost = $ 20 x 17 180 hours = $ 343 600 Direct Material Cost = $ 142 000 Total Manufacturing Cost = $ 600 880 + $ 343 600 + $ 142 000 = $ 1 086 480 Cost per unit = $ 1 086 480 3800 units = $ 285.92 per unit Question b: Traditional Costing Predetermined Overhead Application Rate: Predetermined Overhead (Labor per unit) = $ 325 000 + $ 2 340 000 + $ 5 000 000 200 000 hours = $ 38.325 per hour Total Overhead Cost = 17 180 hours x $ 38.325 = $ 658 423.50 Total Direct Cost = $ 20 x 17 180 hours = $ 343 600 Total Direct Materials Cost = $ 142 000 Total Manufacturing Cost = $ 658 423.50 + $ 343 600...
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...Traditionally cost accountants had arbitrarily added a broad percentage of analysis into the indirect cost.[3] In addition, activities include actions that are performed both by people and machine. However, as the percentages of indirect or overhead costs rose, this technique became increasingly inaccurate, because indirect costs were not caused equally by all products. For example, one product might take more time in one expensive machine than another product—but since the amount of direct labor and materials might be the same, additional cost for use of the machine is not being recognized when the same broad 'on-cost' percentage is added to all products. Consequently, when multiple products share common costs, there is a danger of one product subsidizing another. ABC is based on George Staubus' Activity Costing and Input-Output Accounting.[4] The concepts of ABC were developed in the manufacturing sector of the United States during the 1970s and 1980s. During this time, the Consortium for Advanced Management-International, now known simply as CAM-I, provided a formative role for studying and formalizing the principles that have become more formally known as Activity-Based Costing.[5] Robin Cooper and Robert S. Kaplan, proponents of the Balanced Scorecard, brought notice to these concepts in a number of articles published in Harvard Business Review beginning in 1988. Cooper and Kaplan described ABC as an approach to solve the problems of traditional cost management systems...
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...against its own suburbs, and the suburbs often have an advantage in attracting residents and businesses. They may offer lower taxes, better schools and less crime. As residents and businesses relocate, the cities and towns they departed from lose a little more of their tax base. Less money is available unless tax rates are raised. Additional pressure may come from declining demand, regardless of the reasons. An example is rural road maintenance. In these cases, economies of scale are less easily achieved, and the final costs become more expensive. In the United States, the federal government is shifting some responsibilities to state and local governments but providing only limited funding to fulfill those obligations. Regardless of where the pressure is coming from, the message is: better, faster, cheaper – hold the line on taxes, but don’t let service slip. Meeting this daunting challenge often requires governments to: * Determine the true and actual costs of services. * Implement process improvements. * Evaluate outsourcing or privatization options (i.e., is it better to deliver internally or purchase from external organizations?) . * Align activities to the organization’s mission and its strategic plan. The solution for...
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...Running head: ABC Systems: Are they Advantageous ABC Systems: Are they Advantageous Jamie Parson Liberty University Abstract Activity based cost accounting provides companies with detailed and pertinent information that enables them to accurately cost the manufacturing products. Although it is at time confusing the use of an ABC system allows managers the details they need to make educated decisions about production and costs. The use of the ABC system is not always the most popular way for companies to go, but is it worth it? ABC Systems: Worth the Work? Activity Based Costing or as it is more commonly labeled “ABC” is a costing system that firsts assigns cost to activities and then assigns them to product based activities used towards that product. Costs are assigned to activities in a detailed manor so that detailed costs per activity are available. Once costs are assigned to activities they are than assigned to products based on the products use of that resource. ABC techniques allow businesses to decide which products, services, and resources are increasing their profitability, by providing more detailed information to management. The implementation of an ABC costing method it not right for all corporations; however for the corporations that fit the model for an ABC system, managers are more educated to make informed decisions about the true cost of a product. The use of this system allows more accurate and cost effective: pricing, costing, process improvements...
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...Management Accounting Assignment Activity-Based Costing (ABC) is a theory for cost management controlling. Activity based on the management aims to describe a company as a series of activities which are related to customers’ desires and costs. Activity-Based Costing is a process for calculating the cost of the activities of an organization. Activities within an organization are identified and an average cost is related to each activity. The total cost of a product is the sum of the total costs of activities required to produce the product. The cost of every activity for products is identified as (the average cost of the activity) * (the number of times the activity, which is required for that product). Cooper and Kaplan (1992) explained how Activity-Based Costing allows the very important distinction between resource usage and resource purchase. The difference is the unused capacity. Removal of this unused capacity allows costs to be decreased. Turney (1992) thought that the important non-temporal links between cost and company quality. He also explained how it is important between assets, resource drivers, activities, activity drivers, processes, company performance, cost drivers, and cost. Turney (1989) claimed that underlying Activity-Based Costing is type of an assumption that activities cost resources and products consume activities. Activities contain the establishing vendor relations, spending, paying out, setting up a machine, running the equipment, reorganizing...
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...potential of ABC Joseph A. Ness Thomas G. Cucuzza Many companies have used activity-based costing (ABC) in onetime profitability studies to help them decide which products or customers to cut or keep. But ABC can be much more than a superior accounting technique that shows how much money individual products are really making or losing. When ABC is woven into critical management systems, it can serve as a powerful tool for continuously rethinking and dramatically improving not only products and services but also processes and market strategies. To use ABC in that fashion involves managing in a radically different way. And that, of course, means the people in a business—from the CEO to frontline workers—must change radically, too. No wonder so many companies have found activity-based management so much more difficult to implement than they had imagined. Thousands of companies have adopted or explored the feasibility of adopting ABC. However, we estimate that no more than 10% of them now use activity-based management in a significant number of their operations. The other 90% have given up, or their programs are stagnating or floundering. The problem is that managers often do not think of activity-based management as a major organizational-change program. It is. Combing the organization to pinpoint all the useful information about the direct and indirect costs of a product or service is a huge undertaking. So is setting up an information system that can track those cost-contributing...
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