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Account-based costing is a costing method that delegate the cost incurred to the products and services based on the activities executed for the products and services. The assumption of ABC is products and services are the outcome of activities whereby activities uses resources when produce the productions or services. The cost of resources is being distributed according to the resources used during production. The amount and cost of resources will be discovered before the cost is distributed as ABC method distributing cost according to the quantity of resources used during production.
Advantages of Activity-Based Costing
Firstly, ABC method is giving the users a more precise analyze on profitability of products and services thus users can have a better strategy or decision on the price that they should sell, which product line that they should produce so that they can maximized the profit. ABC method is helping in improving the products by providing a more precise calculation of cost driver to the users. By having an accurate result, users can decide a more suitable design and quantity to produce. Thirdly, ABC method provides information on the field whereby improvement is needed. Users will then act on the field where improvement is needed so that customers are satisfied with the products and services. Next, improving the product costs will contribute to a better estimation of costing such as cost of planning, budgeting and pricing decision making process. Lastly, in order to get better information for decision making, the costs of producing of ABC method is expanded in ABC method.
Disadvantages of Activity-Based Costing
The main disadvantage of ABC method is it is complicated, expensive and time consuming. It is expensive to maintain the process of collecting data and data entry these steps require important resources. Secondly, the details of ABC method are important but too focus on details will make the users lose their sight on the bigger picture of the companies. Besides, it is impossible to distribute such as salary of chief executive certain overhead. The reports of ABC may not adapt the standard of certain departments of government and as the result, companies will have to keep two costing system and accounting book to meet the requirement of internal and external of companies. This is seems to be doing a duplicate job and is a waste of time. Last but not least, acceptance of ABC method is another disadvantage of ABC. Traditional costing has been served organization for many years and they may not familiar with ABC method as ABC method is more complicated compared to traditional costing.
Activity Based Costing VS Traditional Costing System
For traditional costing method, overhead is distributed according to the volume of cost driver or in other word overhead is divided equally among all the products that are produced. For ABC method, the overhead is distributed according to the activities used for production. Since traditional costing method distributed the overhead cost equally among the products, it seems hard for us to determine which product is using the most resources and vice versa. Unlike ABC method, the overhead cost is distributed among the products according to the activities used and it makes us clearer view on the real cost of each product that being produced. Although ABC method is giving users a clearer view on the cost, yet it is more expensive to set up compared to traditional costing. Apart from that, ABC method is more flexible in preparing a report as ABC method is concentrating on compiling costs through few key cost drivers and therefore it enables users to generate different reports according to their demand, whereas for traditional costing method, the cost is being compiled through unit produced. ABC method is able to provide better and more accurate reports than traditional costing method but traditional costing method will still be used to fulfill the requirements of conventional financial reporting.
How Implementation Activity Based Costing from Other Countries
The first case study chosen is a Hong Kong case. A survey is carried out to investigation why users choose to use ABC method and whether users are satisfied with it. The final result shows that few companies are using ABC method and most of them are satisfied with ABC method. While implementing ABC method, adopters will always face problems like gathering information, altering ABC method so that it is suitable for new activities and recruiting staff who familiar with ABC method. The reason why ABC method is implemented instead of traditional costing system is to get a more accurate cost data. Disadvantages of ABC costing still exist and one of the main problems is lack of experienced employee, thus setting up ABC method without experienced employee is time consuming. Besides, satisfaction with traditional costing system and without support from management level to implement ABC method is the reasons why ABC is not implemented.
Another case study chosen is a Thailand case. In this survey, top management support for ABC method is the main factor that affects the successfulness of ABC. This factor is claimed to be the main reason that contribute to the success of ABC. After implementing ABC method, users claimed that the measurement of performance is improved, consistent improvement and more effective in budgeting. However, there are still challenges such as low coordinating among departments. According to the result of survey, shortage of support from management level and resistance to ABC method from employees is not an important issue. Thais always carry out jobs according to the instructions given by their supervisor and decision is always made by management level therefore this is not seen as a critical issue. This study shows that although usage level of ABC in Thailand is low but the interest to implement ABC is much higher. Some major reasons of implementation are the competitive environment and traditional costing method cannot provide the accurate costing.