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The steps to recall the activity based costing on a products is determine the organizations activities. Secondly, determine the reasons influences on activities which is known as cost drivers. Thirdly, determine the cost pools which is directly proportional to the cost centers by collecting the activities data. After that, the total costs allocation quantity identify the products overheads on the basis of activities usage. (Jawahar-Lal, 2009). Finally, determine the products total costs by adding the direct and indirect costs. ( Rajasekaran, V. , 2010).
Activity based costing utilize non unit-based cost driver. In activity based costing, the fixed overhead costs different in proportional as the activities level changes. (Ronald J. Lewis, 1995) Activity based costing overheads costs establish the activity cost pools whereas traditional costing system overhead costs are allocated by departments which is known as cost centre.
Traditional costing systems use a single, volume-based cost driver. The batch level, product level and facility level activities are fixed cost which mean the activities costs do not changes when the level of activities production changes. The variable overhead costs are assigned to the products based on the direct labor usage and fixed overheads costs are assigned to the individual products. It may not showing the actual activities cost when fixed overheads are apportioned on the basis units of activities production .
Activity based costing controls the cost of total life cycle to improve the profitability of the activities. It is also to identify the cost relationship of different service level of an activities to improve the budgeting efficiency. Activity based costing can also avoid the wasting of visible non value added activities on a product. In the manufacturing process, activity based costing improves the sell and buy, price decisions and estimating price that are related on product cost. Activity based costing assigns cost to the products according to the transactions number of the providing product involved in the process to identify cost pools. This enable company mangers to improve performance and maximize the value of the shareholder of the company. Moreover, due to the activity based costing focuses on the cost linking effectiveness when producing goods, the activities are more accurate and reliable for the production of a company.
Advantages of ABC
Accurately of estimate costs
Majority, activity based costing helps to estimate the non profitable and insufficient of the products of an company. It can enables the managers to operate the activities by a more accurate decision making to gain profit.
Price reduction on the product
Besides that, activity based costing helps a company reduce the price of the product and increase the productââ‚¬â„¢s selling price which is consumed by customers.
Eliminate non-value added services
Activity based costing helps the company to avoid non-value added services such as duplicate process on an activities so that the company can achieve a profit target on those activities.
Management are able to budget the company costs due to the activity based costing helps to identify the more accurate overhead costs. It can enables the managers to create budget effectively on the production activities so that the company can gain a higher profit.
Disadvantages of ABC
High cost to implement
To implement an activity based costing, a company need to use a very high cost to undergo this method. The company also must wasting the cost to train employees to undergo activity based costing as well. Normally, the small firms cannot stand for activity based costing method for their production.
Time consuming for the production
However, activity based costing is a complex method for the operation of activities, it takes a longer time and it is an costly process to operate the production process.
Conforming to GAAP
A company need to implement additional costing system to replace activity based costing because the activity based costing does not conform to generally accepted accounting principles (GAAP). The additional reports which is including the manufacturing costs are required by GAAP because GAAP only showing the product costs.
Activity based costing is only assigning potentially relevant cost to the products and easily misinterpreted the product costs. This condition will confusing the managers to make decision making on which is the most important relevant cost on the products during the production process.
To overcome the limitations of ABC, the integrated information system is required to identify the resources used in activities, the costs of activities consumed, the actual rate on the activities, to overcome the problems related to Traditional ABC. For example, the companies must determine the reasons associated to the cost object such as amount resources consumed on the activities. This resources include of direct material consuming, time or other related measures n the activities. This can enables the flexibility of companies in choosing the resources consuming on activities and also helps to find out committed or actual resources used on activities.(Ashford C. Chea , 2011).
Besides that, in a manufacturing company, the large firm is despite the disadvantages by identifying the cost objects of a firm, the different between the direct and indirect cost, the resources that is consuming on activities, the activities categories. Therefore, the extract of company information can be obtained on the activities. (F.Henrik and J.Erling, 2011).
The results and opinion from the manufacturing company managers conclude that the ABC method clearly showing the operations of the activities enable the managers for decision making on the activities, describe the different activities operations and identify the accurate costs of product operations. According to the journal, the allocation of costs to the costs object is more reliable to detect the relationship of costs consumptions and activities operations as well as the information is wider provided compare to traditional costing system. (P.Boris, 2010)
Due to the strongly competition, ABC system is required for domestic and international companies for the business improvement on production system. (Javad Masomi et al, 2012).
In the supply chain business, ABC method helps managers to determine the accurate and reliable related costs on the activities.( Imad J. Zbib et al, n.d).
Compare to the traditional costing system, activity based costing supply the more accurate marketing and manufacturing operations. Meanwhile, activity based costing method including the facility-costs such as depreciation, insurance and so on which is flexible on the production. Conversely, the facility-costs traditional costing system are fixed and does not vary as the production level changes. Therefore, it is relevant despite the disadvantages of ABC.
The countries research
In 1980s, activity based costing became a main method and used for the manufacturing company. For example, under the sector of textiles and clothing, UK was shedding labour for the workshop for 28% and to the tune of approximately 142,000 jobs. (UK Fashion Report, 1998/1999). This report showing the reasons for this condition which was including the changes on the customer demand, products pricing controlled by retailers due to low inflation, the costs of production and labor was lower on the other countries. Meanwhile, the costs of the domestic production became higher due to the bigger sub-contract incidence.
Gunasekaran (1999) implements activity based costing to the manufacturing sector and consider some issues which is including the management team process should be as small as possible, analysis for the complex activities, control the decision making process and so on. According to the research, this clothing and textiles company manufactures a few products and using traditional costing system and activity based costing. Under traditional costing system, it is not suitable for manufacturing sector due to the absorption and direct costs which are related to the derived taxable profits. Conversely, activity based costing allocates the activities level of direct labor and production overheads and gain a more profitable price compare to traditional costing system.
From this research, it is clearly showing that the process of activity based costing is widely used in UK. Under the method of activity based costing, the efficiency of the production is increases, the costs of production is decreases, the budgets are controlled by the companies, helping the managers to do decision making on the price of the product and provide the accurate customers individual.
In Canada, health care services are main sector for their country development. There is an allocation of providing funds to the long term care sector. The expenses of the long term care sector increases from $ 426 million to $ 2.14 billion between 1980 to 1995. In this health care sector, the costing system is significant to identify the cost related between financial data and clinical works. The cost drivers are the reasons which is associated with the actual cost.
According to the opinion of this researches, traditional costing system is just identify the units costs based on average costs which is not the exact costs on individual products. Therefore, activity based costing is used for this sector to get an exact cost. In health care services, activity based costing helps to calculate the resources consuming on customers. Besides that, activity based costing allocates the costs results in different changes of the health status but not only focuses on total volume. This research showing that activity based costing provides an accurate information and through this costing system the health care services sector can always respect the utilization of the customers.
This research is finding howââ‚¬â„¢s the ABC method influence the Thailand telecommunications sector. In Thailand, there is an analysis of the reasons of how is the implementation of activity based costing affects the companies (Chongruksut, 2002; Chongruksut & Brooks, 2006). According to the research between 1999 to 2002, Thai Government had expand the telecommunications sector under the Thai Constitution 1999 provisions by committing to the World Trade Organization (WTO). In 2002, the competition of telecommunications sector was very high in market due to the unlock of International Mobile Equipment Identity (IMEI).The changes of the telecommunications and mobiles are very fast due to the rapid improvement of the modern technologies.
Therefore, the companies decided to implement activity based costing to improve the business and get a more accurate information under ABC method. The implementation of ABC shows an accurate information for the high costs products in telecommunications sector. ABC also identify the different product strategies and low price strategies. Besides that, ABC helps to increase the capacity of the companies in the competitive market and help to determine the changes on the organizational structure in telecommunications sector. Moreover, ABC improves the communications between the different departments in a company by clearly showing the Budgeting or Cost Analysis results.
From this research, firstly, it is clearly showing that ABC method influence the culture, technologies, organizational structure of Thai telecommunications sector. Secondly, it can be seen that the corporate social responsibility (CSR) is strongly influencing the implementation of ABC. ABC is an usefulness method to overcome the competitive market in Thai telecommunications sector.
The researchers analysis the factors that affect the organizations structure in Australia based on the research study. This research find out of why the rate of ABC method is relatively low in Australia and how the Australia community adopt to ABC method. According to the research of Booth and Giacobbe (1997, 1999), they found that only 12% of the 213 manufacturing companies were undergo the implementation decisions. However, by using the 9 subjects of semi-structured interviews, Norris (1993) found that there is high division of manufacturing firms like to use ABC method.
The research identifies 77 site of ABC. The managers of 30 sites agreed to use ABC method for decision making. They compare the ABC method with traditional costing system. In a result, ABC system is more accurate and improves their job performance. ABC method is also helps to find out the judgments in manufacturing firm.
From the research, it can be seen that the rate of implementation of ABC achieve to 78% in the research (Baird et al, 2004). It proves that the significant of ABC method is widely and useful in Australia manufacturing firms to operate the business.
In a conclusion, activity based costing is widely use in different sector in business activities. Activity based costing is able to determine the different way of the reasons which are influencing on the activities. Compare to the traditional costing system, activity based costing is a much more better way to focus on the profitability of a product. It helps to figure out the lower price and higher selling price of the products so that the companies can achieve a target profits. In the complex companies field, ABC helps to determine the changes of pricing on different products, services, or distribution methods. (Nadine Wiese, 2009)