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Activity Based Costing (ABC) - Assignment Example

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Activity Based Costing (ABC)

Historically, ABC started to become popular as an alternative approach to traditional cost accounting about three decades ago, where the latter has become increasingly proving its irrelevance (Emblemsvag, 2010). The increasing automation of production as compared to being labor-intensive, the multiple product lines compared to small number of products being produced, and the increasing overhead cost of companies are factors which are said to have contributed to the popularity of ABC (Emblemsvag, 2010).

ABC is said to have addressed some important issues which traditional cost accounting may have left hanging when it comes to question of reason or logic in cost allocation. Comparing the two methods of allocating cost, Emblemsvag (2010) highlighted three salient points of ABC:

1. ABC assumes cost objects consume activities whereas traditional cost accounting assumes cost objects consume resources,
2. ABC uses drivers at various levels (hence consumption, and therefore cost varies at all levels), while traditional cost accounting usually employs volume related allocation as bases for costs, and
3. ABC is process oriented, while traditional cost accounting is process oriented.

Higher productivity as a desired goal or objective, therefore, is better achieved using activity based costing than traditional cost accounting. ...
Such opportunities may not be readily available in a traditional cost accounting system, making ABC the wiser choice for productivity managers. Therefore, ABC is a tool that has proven to be a valuable tool for efficiency and productivity performance, and probably an indispensable method of cost allocation and cost accounting for modern organisations. Many more typical benefits of ABC have been cited (Value Based Management, 2011), and among them are: Ability to identify the most and least profitable customers, products, and channels, Ability to easily identify the root causes of poor financial performance, Ability to track costs of activities and work processes, Equip managers with cost intelligence to better drive improvements, Meet important marketing objectives, such as determination of a better marketing mix, enhancement of bargaining power with customers, and achieve better positioning of products in the market From the above premises it can be gleaned that ABC offers the better solution for any problem arising from overhead cost allocation. Definitely, ABC is an improvement of what traditional cost accounting aims to address, i.e., allocation of cost to where it matters most, keep costs down, and contribute to rising profit levels for the company through increased efficiency and productivity. But is ABC really perfect? Has it become the eureka of overhead allocation, where a lasting solution has been found to last a lifetime? Is there a downside, a lowlight, anything that ABC would not be able to achieve? Is it the perfect cure? There are some weaknesses when ABC is implemented by organisations. But such weaknesses or limitations are far ...Show more
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Summary

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. …
Activity Based Costing (ABC)
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