StudentShare solutions
Triangle menu

Critical analysis of activity based costing and traditional costing system - Assignment Example

Extract of sample
Critical analysis of activity based costing and traditional costing system

In the efforts to implement the Strategic Management Accounting approach in organizations,modern business enterprises find Activity-Based Costing as an improved costing system by which the problem of large number of indirect costs and their allocation problem can be overcome It has been observed that ABC method is the most sought after innovation in the field of management accounting in the last two decades. The method was originated in the Unites States of America during the 1980s as an improved system to enable better cost allocation by means of classification of more costs as direct (Cooper and Kaplan, 1988). The advocates of ABC method argue that the firms would be able to enhance their efficiency and cost control without having affected the customers' value, if ABC is successfully implemented and followed. However, its acceptance rate is still overwhelming across industries and countries despite the strong recommendation by Robin Cooper and Robert S Kaplan, the proponents of the method. The main problem associated with the low implementation rate may be attributed to the difficulties and complexities of the system. This paper discusses and analyses the ABS system as an improved cost control technique. The paper takes comparative and analytical approach; in which comparison is made between ABC and Traditional Costing System (TCS). The paper discusses the various aspects of ABC as a superior technique of cost control by assuming hypothetical examples. Every attempt is made to analyse the important characteristic of ABC with that of TCS in a critical manner.
2. Activity Based Costing- Meaning and Significance

ABC as the name signifies is a system of costing based on activities involved in transformation process. ABC is the process of simplifying and clarifying decisions required to be made by the management using activity costs. It analyzes the cost and the benefits of various operational and business activities. According to Computer Aided Manufacturing International (CAM-I), "Activity-based costing is a methodology that measures the cost and performance of activities, resources, and cost objects. Resources are assigned to activities, then activities are assigned to cost objects based on their use. Activity-based costing recognizes the casual relationship of cost drivers to activities" (CAM-I).
ABC, which was basically developed as an alternative to traditional costing system enhances the scope of performance management as a measure. This system was propounded by Robin Cooper and Robert S Kaplan as a superior tool to overcome the limitations of TCS. The main inefficiency with TCS is that it fails to accurately measure the actual cost of production and hence decisions are made out of inaccurate data. Therefore, the main logic behind the emergence of ABC system revolves around supplying accurate information regarding the cost of production, cost allocation; which are vital for cost and profit analysis. The main argument in favour of the ABC system is that it is against the traditional system of cost allocation on a percentage basis. ABC system, instead takes into account the cost effect relationship for cost allocation on a subjective basis. Whenever a cost is incurred and identified in relation to an activity, the cost is allocated to the extent the product has used the activity. Supports of ABC system strongly believe that supplying accurate information is the most important benefit of this system. In addition, ABC is justified from the benefits such as cost control, cost reduction, more accurate allocation of indirect costs, improved insight into cost causation and identification of activity costs and improvement of operational efficiency (Kaplan and Anderson 2004). It has also been justified for being able to supply accurate cost information which is necessary for fair pricing and thereby adds value to customers. ...Show more

Summary

In the efforts to implement the Strategic Management Accounting approach in organizations,modern business enterprises find Activity-Based Costing as an improved costing system by which the problem of large number of indirect costs and their allocation problem can be overcome…
Author : kaycee33
Critical analysis of activity based costing and traditional costing system essay example
Read Text Preview
Save Your Time for More Important Things
Let us write or edit the assignment on your topic
"Critical analysis of activity based costing and traditional costing system"
with a personal 20% discount.
Grab the best paper

Check these samples - they also fit your topic

Activity Based Costing (ABC)
1. Activity Based Costing (ABC) is the perfect cure for the problem of overhead allocation within organisations. Critically evaluate this statement. In general, activity based costing (ABC) has been largely described as an alternative method of allocating overhead costs based on logic rather than arbitrarily imputing cost entirely to resulting production output.
12 pages (3000 words) Assignment
Traditional Absorption Costing versus Activity Based Costing
The allocation of overheads has always been a matter of concern in manufacturing businesses especially in recent times. The method used in allocating overheads plays a role in the determination of the comparability of the costs of doing business vis-à-vis the cost to competitors.
12 pages (3000 words) Assignment
The Activity Based Costing System
Accounting for decision making Contents Contents 2 Introduction 3 Effectiveness of Traditional and Activity Based costing system 7 Effectiveness of Traditional Based costing system 7 Effectiveness of Activity Based Costing 10 Conclusion 13 References 14 Introduction Costing systems are types of information systems which require a particular type of information like the number of units produced and the number of direct labour hours of value that are involved in the process. These data are put as input into the costing system and the specific methodology of the costing system is used to produce information like the cost of the product and other important information as the output. The same da
10 pages (2500 words) Assignment
Variable costing
TABLE OF CONTENTS Executive summary 2 Assumptions of marginal costing 3 Uses of marginal costing in short term decision making 3 Types of costing methods 4 Marginal costing absorption method 5 Advantages of Marginal Costing over Absorption Costing 6 Recommendation 7 Conclusion 7 Costing is one of the managerial accounting functions which needs a careful selection and evaluation of the effectiveness of every technique used by a firm.
4 pages (1000 words) Assignment
Finance - Budgeting
Since budgets are often used in critical business decisions, it is imperative that companies employ a budgeting process which reflects the true cost of operation. Also included in this is the presence of monitoring systems in order to look performance of the company.
4 pages (1000 words) Assignment
Absorption costing and marginal costing
by increasing the production of the product and as such produced 45,000 units with a thought that by putting the pressure, the selling agents could push the products more than the estimated sales into the market. However, only 20,000 units could be sold for which the profit
9 pages (2250 words) Assignment
Absorption costing and marginal costing compared
It means both fixed and variable costs are deducted from sales proceeds to ascertain profit. Naturally, the profit shown under full costing method is the
9 pages (2250 words) Assignment
Accounting and Finance for Managers
d a flaw in the traditional accounting model of overhead cost allocation and led to a higher return on investment (ROI) for firms that implemented this new cost management system (Cooper & Kaplan, 1988; Turney, 1991; Kaplan & Norton, 1992). Critics, on the other hand, argued
11 pages (2750 words) Assignment
A critical evaluation and appraisal of variable costing
References 8 This is a report about a review of marginal costing as used in the managerial accounting system. Certain terminologies associated with
6 pages (1500 words) Assignment
Management Accounting
The primary purpose of the costing systems in companies is to ensure that the cost of production, operation and other activities are determined and controlled. The management accountants
7 pages (1750 words) Assignment
Get a custom paper written
by a pro under your requirements!
Win a special DISCOUNT!
Put in your e-mail and click the button with your lucky finger
Your email
YOUR PRIZE:
Apply my DISCOUNT
Comments (0)
Rate this paper:
Thank you! Your comment has been sent and will be posted after moderation