The Development Of Activity Based Costing Accounting Essay

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During the last twenty years, both financial and non-financial performance indicator models have been developed as performance measurement and for target setting. In the book of "Relevance Lost" (1991) by Johnson and Kaplan has stated the criticism on the over dependence of short-term financial performance approach. The existing systems are not helpful for process control and computing individual production costs. They have argued that short-term financial performance has become insufficient gradually as they have been compromised by innovations, accelerated changes in technologies and shortened product life cycle in the production operations of the enterprise.

In addition, Johnson and Kaplan also demonstrated the importance of non-financial indicators in generating the measurement for critical short and long term goal. The non-financial measurement should be based on the companies' strategy which consists the terms of manufacturing, marketing and R&D to measure the profits. They claimed that not all the indicators are relevant for firms as they may unable to focus on too many measures at once. Moreover, the new production environment will force the managers to require new measurement systems, thus, short-term financial measures such as return on investment will be neglected and replaced by non-financial indicators which contribute better predictors and targets for the firm's long term success.

Generally, cost information, especially the accurate cost information, is one of the most significant determining factors for decision-making in the firm. As what said by Cooper and Kaplan, "decisions about pricing, marketing, product design and mix are among the most important ones managers make. None of them can be made effectively without accurate knowledge of product costs (Cooper and Kaplan, 1988)". herefore, there are needs for a cost accumulation system in generating relevant cost information for decision-making (Drury, 2008).


According to Player and Keys (1995), activity based costing (ABC) system is a costing methodology that measures the activities used for production of products or services by identifying the costing method and then allocate these indirect costs such as overheads directly to the process cost pool so as to better trace back the existing cost.

Ray (2012), Swenson (1995) and (El-Deeb, Tawfik, Bassim, Elwy 2011) mentioned that this costing method can efficiently in assisting the managers to make the right decision by determining the product line, price of product and location for sourcing components. By that, ABC has been successfully promoted as it overcomes the distortion of traditional costing accounting that only relies on labour hours. (Ben-Arieh and Qian, 2003).

Moreover, Richard, Gerald and Eulgene ( 2011) make a criticism on ABC that the allocation of the indirect costs did not reflect on the relationship between products and costs during the short-term due to the indirect cost is not a daily basic activity and thus the allocation of cost are not flexible. Furthermore, the landscaping costs of each product are not easy to get as the activities are not directly associated ( Peter and Turney, 2000) and for the costs that are involving in time gap that derived from traditional accrual costing may suffer from the temporal allocations such as depreciation and development. (J.Innes, 2000) .

The development of activity based management (ABM)

Although the fundamental aims of ABC are tending to focus more on the product costing especially in allocating the indirect costs, but somehow managers nowadays using ABC for the purposes of enhancement in profit as well as the improvement of process and this is known as activity based management (ABM). ( Plowman 2001).

-In fact, the use of ABC for management purposes has become so important and effective

that two other systems derived from ABC philosophy have been established, they are

Activity-Based Management (ABM) and Activity-Based Budgeting (ABB), (Cooper and

Kaplan 1998).

-However, unfortunately, it could not be applying to development of technology, and the growing of the firms, where they were producing wider and more diverse product ranges, and the input of labour to the production process was declining compared to the start of the century (Cooper and Kaplan, 1988).

- Secondly, ABC system innovates costing system with more accurate cost information where costs are assigned to cost objects (Peter B. and B. Turney, 2000). ABC system assigns activity to cost objects based on the activity drivers that accurately measure consumption of the activity. An activity driver is a measure of the consumption of an activity by a cost object (such as a product). As a result, the ABC system corrects the inaccuracy of the traditional system by choosing the activity driver that could accurately measure cost consumption by each product.

-And this new technique is considered to offer more accurate product costs, through the method of allocating costs to products by measuring the cost-allocation bases of different activities used by different products