Accounting in its organisational context - Essay Example

Topic: Accounting in its organisational context Explaining the main features and problems for service organisations in the United Kingdom (UK) and/or the United States (US) in pursuing techniques such as Activity Based Costing (ABC). INTRODUCTION: There are two popular methods of allocating costs that a service organisation in the United States and the United Kingdom use. The traditional costing method is uses only one or two cost drivers. On the other hand, the activity based costing allocates total costs using the different activities and processes in servicing a customer or groups of customers. Admittedly, many people dislike change. Thus, the popularity of the traditional costing accounting method still persists until today. The following will explain in detail the many advantages and disadvantages of using the new costing accounting method called Activity Based Costing when contrasted and compared with the Traditional Cost accounting method. BODY: Many companies in the United States have shifted from to Activity Based Costing. The prior costing method normally used is the traditional based costing. However, the Activity based costing uses several pre -determined cost drivers that include materials bought to service the customers. In addition, the new activity based costing method is better than the traditional costing method because this new costing method distributes the total estimated cost of service organisation using the daily service activities (Caplan et al., 2005; p1). Furthermore, Activity based costing is a better costing method as compared to the traditional costing method if the service organisation has many different products to market. In a nutshell, activity based costing is better than the traditional method of allocating total costs because it uses activities as the stepping stone to reach the main purpose of setting up a business which is to generate profits. Finally, activity based costing is a preferred choice because it does not stop its tracks after it manages costs (Krumwiede & Roth, 2004; p 1). The prior costing method normally used is the traditional based costing. There are main features for service organizations in both the United States and the United Kingdom that differentiate it from the traditional method of accounting. One of the main features that distinguishes it as a better costing method is that it has many cost cools unlike the traditional costing method. The traditional costing method normally uses only one or two cost pools. The most popular cost pool under the traditional costing method is that total cost is divided by the total number of hours to arrive at a per hour rate. Then the actual number of hours spent for servicing a specific customer service order is multiplied by the pre -determined hourly customer service rate to arrive at the actual cost (Hussein, 2004; p 1). However, the Activity based costing uses several pre -determined cost drivers that include materials bought to service the customers. Also, the number of machine set ups used to repair a car in a car repair centre is one cost driver that that has made this costing method a success. In addition, the number of inspections that have been done in order to determine if the repair shop employees are doing their jobs to comply with the minimum benchmark in terms of job cost and quality is another cost driver that puts activity based costing in high demand. This is also used in the traditional cost accounting method (Lewis, 1993; p. 1). In addition, the new activity based costing method is better than the traditional costing method because this new costing method distributes the total estimated cost of service organisation using the daily service activities. On the other hand, the traditional costing method less accurate because it uses the volume or units of services done or hours spent in distributing the total estimated cost of service business. In addition, the activity based costing method is a better method because its uses both financial and non -financial rates in distributing total costs. Whereas, the traditional costing method uses only financial allocated costs in the sharing of the total estimated cost. Furthermore, Activity based costing is a better costing method as compared to the traditional costing method if the service organisation has many different products to market. For, the activity based costing uses more than two cost drivers to better explain how the costs were distributed and in turn feed management with the much needed cost data for their decision making activities. The decision -making activities would generally include whether to close the service business because the total costs did not exceed the total service revenues during the past year or years of operation. And, this cost data will be of utmost importance in deciding whether to set up another branch in the suburbs of London. This expansion would be a good decision if the cost data shows that the total cost charged to a particular service order under the activity based costing method would show that the total revenues for the past year has exceeded by a wide margin the total costs charged to each service activity (Barnes, 1992;p 3-22) Further, activity based costing is a better costing alternative than the historical traditional costing method if management is determined to base their decisions to set up a new service facility in Wales or Scotland. The main contention here for electing the activity based costing method is that the activity based costing method entails more mathematical and financial computations, analysis and interpretations than the traditional costing method. Thus Activity based costing will better help management's decision to close shop, to set up shop in a new uncharted location well inside the competitors' bailiwicks. In a nutshell, activity based costing is better than the traditional method of allocating total costs because it uses activities as the stepping stone to reach the main purpose of setting up a business which is to generate profits. This stepping stone is focused on the allocation of total estimated costs emphasising the important influence that the service organisation's processes as well as the tasks and activities that occur within these processes. These cost drivers that are important in activity based costing analysis include labour hours or cost, machine hours, number of machine set ups and machine setup costs, he number in terms of weight of materials used in the service activities of the organisation, the purchase orders, the number of parts used by the service organisation, the number of inspections done by the quality control staff, the square footage that each activity or process uses in its daily money -generating service activities and the design time. In addition, other activity based cost drivers that make activity based costing a right choice includes the value of the service equipment used, the average number of customers frequenting the service organisation based on the company's historical customer visits trend, the number and amount of the service activities done within one accounting period, the number of operations or activities that happens within one accounting period and the number of hours that the service equipment technician or crew spends on each money making activity. Also, one very good cost driver used in activity based costing is the determination of the costs allocated to each branch or unit within the organisation (Maiga & Jacobs, 2003; p. 1) . Finally, activity based costing is a preferred choice because it does not stop its tracks after it manages costs. This costing method delves deeper into the why the costs allocated to product as compared to the not so deep analysis used under the traditional cost accounting method. In addition, the activity based costing method shows in detail how the costs were allocated using more cost drivers than the traditional cost allocation procedures. Simply put, the use of the number of machine set ups in this new costing method will make the members of the board of directors at ease in deciding the fate of an employee, a manager, a unit, a division, a department or a branch of the organisation as compared to relying on the cost data generated under the traditional cost accounting procedures (Platt, 2001; p.1). Likewise, there are also problems related to activity based costing that differentiates it from the traditional cost accounting method. There is difficulty in computing as compared with the traditional costing methods. For one, there is difficulty in computing as compared with the traditional costing methods. Another problem with the activity costing method is that it best suits service organisations that have spent large amounts of money in the business. Further, the activity based costing would not do well if the service organisation hires many labour workers or crew (Latsaw and Cortese -Danile, 2002; p 1). For one, there is difficulty in computing as compared with the traditional costing methods. The traditional method of estimating the cost allocation to a certain product or service entails only the use of the direct labour hour cost driver or only the use of machine hours used to service the repair of the car in our study of the car repair service organisation. Evidently, using the activity based costing method includes the use of more than two cost drivers to come up with the total costs based on the different activities done to service a product or customer. As discussed above, set up hours and number of inspections are additional cost drivers that are a must in activity based costing (Platt, 2001; p. 1). Another problem with the activity costing method is that it best suits service organisations that have spent large amounts of money in the business. For, this method will not be cost efficient if the total capital investments were quite low. In this case, the traditional method of costing where the total estimated cost will be allocated using the total number of direct labour hours or machine hours would be better. In addition, the activity based costing would be awkward and not practical if the service organisation has low overhead costs. For, there is more work to be done by the accounting department under the activity based costing as compared to the traditional costing method. Consequently, the accounting personnel assigned to allocate total estimated costs would have to spent more time here as compared to the lesser time spent allocating total costs under the traditional costing method (Stevenson, Barnes & Sevenson, 1996; p. 1) . Further, the activity based costing would not do well if the service organisation hires many labour workers or crew. For, it is better to use the traditional method of scattering the total cost in this scenario. Finally, activity based costing would be fare well if the service organisation only invests a not so large amount of cash and other assets in the service business. As described above, the accounting personnel would be using too much time allocating costs under the activity based costing method (Stevenson, Barnes & Sevenson, 1996; p. 1). Also your essay should make clear what economic market structure prevails for any individual service organisation you may wish to cite within your work. The economic structure in my specific organisations is the car repair business. The car repair business includes focuses on the cars who run a flat tire because the rubber on the tires have already worn out and these tires can no longer carry the weight of the car and its human passengers. Likewise, the car repair business also helps in the repainting of the car because some of the car owners would like to change the colour, darken the current colour or lighten the current car colours. Also, other car services include the repair of its air conditioning unit, the repairs the car's measuring devices like speed meter, the gasoline meter. Also, the car service business discussed here includes repair of cars engines that do not start or emote engine and car sounds that characterise a sick or dying car. Also, the car repair business includes changing of the car seats, the overhaul of the engines and car wash of the entire body. In addition, the car repair business includes replacing the worn out tires with brand new tires or the cheaper recapped tires. However, the recapped tires do not last as long as the brand new ones. Definitely, the economic structure in my specific organisations is the car repair business is complex and activity based costing is the preferred choice (Anderson, 2002; p 5). CONCLUSION: The above paragraphs have discussed in detail the two popular methods of allocating costs that a service organisation in the United States and the United Kingdom use. To reiterate, the historically traditional costing method is uses only one or two cost drivers. However, the activity based costing distributes total costs using the different activities and processes in servicing a customer or groups of customers. Activity based costing is better than the traditional costing method because the former uses more than two cost drivers that generate more intensive and concise cost allocation and charge reports. Lastly, Activity based costing is a must if the company offers many diverse services. To implement this change, the change - rejecting employees ought to either flow with the times and implement the new activity based costing method or else choose to be transferred to another job or department where the traditional cost accounting procedure is the better choice such as low -capital businesses. Works Cited Anderson, D. 2002. Foundations of Financial Management, London, McGrawHill. Barnes, Frank C. 1992. Management's Stake in Improved Decision Making with Activity-Based Costing. SAM Advanced Management Journal 57, no. 3: 20+. Caplan, Dennis, Nahum D. Melumad, and Amir Ziv. 2005. Activity-Based Costing and Cost Interdependencies among Products: The Denim Finishing Company. Issues in Accounting Education 20, no. 1: 51 Hussein, Mohamed E.A., and Kinsun Tam. 2004. Pilgrims Manufacturing, Inc.: Activity-Based Costing versus Volume-Based Costing. Issues in Accounting Education 19, no. 4: 539+. Krumwiede, Kip R., and Harold P. Roth. 1997. Implementing Information Technology Innovations: The Activity-Based Costing Example. SAM Advanced Management Journal 62, no. 4: 4+ Latshaw, Craig A., and Teresa M. Cortese-Danile. 2002. Activity-Based Costing: Usage and Pitfalls. Review of Business 23, no. 1: 30+. Lewis, Ronald J. 1993. Activity-Based Costing for Marketing and Manufacturing. Westport, CT: Quorum Books. Maiga, Adam S., and Fred A. Jacobs. 2003. Balanced Scorecard, Activity-Based Costing and Company Performance: An Empirical Analysis. Journal of Managerial Issues 15, no. 3: 283+. Platt, David E., and Kristy L. Towry. 2001. Pecos Products: A Project Introducing Complexity into the Study of Activity-Based Costing. Issues in Accounting Education 16, no. 1: 99. Stevenson, Thomas H., Frank C. Barnes, and Sharon A. Stevenson. 1996. Activity-Based Costing: Beyond the Smoke and the Mirrors. Review of Business 18, no. 1: 25+. Atkinson, A., Kapaln, R., Matsumura, E. & Young, S., Management Accounting (5th Edition), Pearson, Prentice Hall., Read More