Definition Of Activity Based Costing Accounting Essay


Activity Based Costing was developed by professors Robert Kaplan and Robin Cooper of Harvard University during the 1980s. It is evolved as a solution to the shortcomings of Traditional Costing Method. Activity Based Costing used as a cost management tool in different types of companies and product cost methodology. ABC also provides more accurate cost information and that helps the company enhance by identifying the products, services or activities which are being losses and improper priced. The reasons of usage of Traditional Cost accounting systems in advance manufacturing company were decreased rapidly in 1990s is because of the results successively showed that the direct labour cost of production decreased and indirect cost increased. Since then, ABC was chosen by company to identify increased of indirect cost and allocate costs to products or services with an accurate method. Activity based costing is a management tool to help managers based on management accounting information to help them make decisions, for budgeting, planning, control purposes.

Definition of Activity Based Costing

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Activity Based Costing is a method of measuring the cost and performance of activities, resources and cost objects. Therefore, it is allocates cost to activities based on their use of resources and allocates cost to objects based on their use of activities. Cost objects can be products, services, tasks, or customers. Activity based costing is a management tool to help managers based on management accounting information to help them make decisions, for budgeting, planning, control purposes. ABM focuses on management of activities as the means to improve the value received by customers profit earned by setting this value. Performance improvement techniques include cost drivers analysis, performance analysis, activity analysis and activity based costing. Thus, a company would stop produces unprofitable products or serving unprofitable customers.

Definition of Traditional Absorption Costing

Traditional Absorption Costing systems adopt a single, volume-based cost driver. This is the reason leads to distorted product cost information. Most of the traditional costing system assigns the overhead cost to product in proportion to direct labour. For the reason that often determine inaccurate actual costs of production and costs of which related services. Moreover, based on the inaccurate cost information can caused to make a wrong decision over value the price of high-volume products and conversely under value the price of specific products. Nowadays, increasing competition in the marketplace, the essential to reduce cost and be providing with more comprehensive of information on product costs. Those shortcomings of traditional absorption costing had been described by Kaplan and Johnson in 1987.

Relevance of Activity Based Costing in Nigeria

On the site of Nigerian, many of the manufacturing companies and services firms are not conscious of the concept of Activity Based Costing. For instance, Dabor and Eragbhe (2005), on implementing ABC, researched five hotels which is located in Keffi Town, Nasarawa State, Nigeria and the result showed that was none of the hotels used activity based costing, 67% use absorption costing. (Source: Field Data 2009). 50% of managers or accountants would like to install ABC system in their company while 20% said no to ABC and 30% not interested respectively. This is because they are satisfied on their current costing system and believe that changing to ABC will relate incurring cost. (Source: Field Data 2009). Another case in Nigeria's company is Gofcecon Ltd. The population of the study composed of four management staffs, three senior management accountants and three senior accountants. In resulted, showed that 100% respondents are unaware of ABC. (Field survey 2010) The period of time that these managers held their professional position are more than are more than 4 years. It reason may be point out their age and time they studied cost accounting. They seem like satisfied with the current method and not willing to change to more complex cost accounting system (e.g: ABC). In Gofcecon Ltd, 60% of the respondents were view that ABC is practicable. Their opinion is ABC can help the company to reduce waste or cost and increase profit. While 40% of respondents view that ABC is not practicable in the company. This is because they debate the ABC is too technical and it may take a long time to prepare. Anyway, ABC still is practicable in Gofcecon Ltd. Most of the Nigerian accountants are lack of knowledge about the new method of activity based costing. They should attempt of new method of ABC, not conservative of old method.


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A case study carried out in a Portuguese telecommunications company which is called Marconi. Marconi providing long telecommunications services and it has changed its traditional management accounting system (MAS) to activity based costing method. In 1995's, Marconi was integrated under Portugal Telekom Group. In 1990's, the Portuguese government commenced a restructure programme of the entire telecommunications sector obeying the decision made by European Community to deregulating the telecommunications market under its member states. This change has seriously affected Marconi's business activity. Marconi and Portugal Telekom have adopted ABC because of legimisation from its regulator. Since ABC has a powerful strategic tool to company being succeed and it would goals to enhance the high efficiency. Manager and the regulator weren't obtained the accurate cost information in detailed by MAS. When the Portugal Telekom was emerged, top managers of Portugal Telecom were require to develop a more complex information systems to protect they criticized by its regulator, managers or competitors for not having a proper information system as all successful companies have. That is the reason of chosen ABC as the cost model to provide completely and accurate cost information to Portuguese telecommunications regulator is because of ABC was restricted by Portugal Telecom's decision.


In 1997, the economic crisis had result that Thai companies to be weak to facing of type difficulties and increasing competitiveness. That means when companies were surviving in a competitive environment, organizations are trended to adopt or implement more advanced management control systems. However, ABC obviously to be a good choice for Thai firms to change their old management control system at the current time. After the economic crisis, they believe that more firms might be adopted ABC as their management accounting systems. The most of important factor is top management of Thai firms. In the high-power distance culture of Thailand, Thai people used to obey the instructions of their superiors. Unless Thai top management willing to accept ABC method and organizational change, ABC will become more widely used in Thai firms. ABC is has not been widely used in Asian Countries, such as Thailand, Malaysia. ABC, which is stated to reduced cost, improved cost control, increased profitability, it undoubtedly is a method for Thai firms improve their business in this unstable circumstance. For instance, Toyota Motor (Thailand) Company has adopted ABC in cost control and production design to set up excellent image and competitive advantages in this situation. In the survey showed that main reasons for not adopting ABC in Thailand firms is ABC too complex and need take a long time to prepare. The rest of reasons are firm's characteristics and business environment and confidence in the existing cost systems. Otherwise, the individual respondents think that factors of economic crisis which had subjected them to increasing competition and growing costs. Hence, Thai firm is forced by it factor to choosing ABC to improve their efficiency of operation and increase profit of products or services.


In 1995, the Australian Society of CPAs conducted a survey about ABC in Australian manufacturing sector. In result, 45% of the surveyed companies had never considered to introducing ABC in their company, 29% were considering adoption of ABC, 14% had refused adopting it and only 12% had implemented ABC. For those companies which had adopted or implemented ABC were believed that ABC is a system to provided more accurate product costing and cost information, improve cost management, cost control and better assignation of overheads cost. Major reason for those companies which rejected the adopted of ABC is the improbability of benefits. For minor reason is several companies were satisfied of their current costing system. For example, MelCo (the company has been concealed to keep privacy) is located at Melbourne, Australia and produces engineering components. MelCo was adopted a conventional costing system where assign the overheads cost to products based on direct labour hours. Therefore, ABC was introduced by a MelCo's financial controller. The previous costing method was provided inadequate and inaccurate information but ABC able to provide more accurate and sufficient information to make appropriate decision. Some of the problems appear during the implementation of ABC, such as lack of resources, educational knowledge and skill of training. Furthermore, collecting and inputting data was also takes a long time to consuming. By the way, the top management of MelCo identifies that ABC is a necessary costing system.

3. Conclusion

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ABC is still relevant for companies in all geographical locations? In four different culture countries I chosen for example of countries is Nigeria, Portugal, Thailand and Australia. Every country I had to give one example of company which is adopted or implemented ABC. In facts, ABC is still relevant for companies in all geographical locations. ABC method undoubtedly is an excellent costing system, it obviously better than Traditional Absorption Costing method. ABC provides more accurate cost information than TAC and relevant information to measuring of performance, cost control and decision-making, reduce costs and increase the profitability. Some suggestions to increase more companies to adopt or implement ABC are make it simplify, improve the cost/systems accountant's knowledge in ABC and training them on the project planning and implementation steps and reduce the time to consumed. Anyway, ABC is a high potential costing system for companies and I expected that it would more widely use in types of companies.