Activity Based Costing (ABC) is a managerial accounting system which determines the cost of activities without distortion and provides management with relevant and timely information. It does not represent just a new set of overhead allocation rules or techniques to value inventory. ABC represents a way to look at operating costs and provides methods to dissect the underlying activities, which cause costs to exist” (Dunn 1891). The problem here, which is to be solved, is “Does the activity based costing play a vital part in financial performance”. For this purpose we have to know about the relevance of activity based costing. Here an example is given to know the difference about the activity based costing and conventional costing. E.g. Assume that Product A and Product B are manufactured by the same company. Product A is a low volume item and new one, it requires particular activities such as additional testing, special engineering, and some machine setups because it is ordered in less quantities. Product B is a big volume product produced constantly and needs little concentration and does not require the particular actions. “If this business makes use of conventional costing, they assign or assign every expense to goods on the basis of the amount of machine hours. This will effect in small expenses rate due to Product A, since it do not contain numerous machine hours. Though, it performs order loads of testing, engineering and setup actions. The Product B will be owed a huge quantity of expenses owing to every device hours, except it insist small expenses action and no special attention” (Emerging Issues in Cost and Management Accounting n.d). The result will create a serious miscalculation of both products’ real price of manufacturing expenses. This costing will raise above this situation by transferring expenses on above the one action that is., the machine hours will not only be the activity, all other activities are taken into consideration while costing the product. Background of the Study: Activity based costing will recognize the cost of additional testing, machine setups, special engineering and other activities that cause the costs. These activities consumed the resources of the company. So in activity based costing, they will calculate the cost of resources used in these activities and the product cost will be fixed accordingly. The cost of activity is assigned only to the product which demands the activities, which means the cost of special engineering, additional testing will not assign to the product B. Aims and Objectives: Here, the objective of the study is to understand “does the activity base costing play a vital part in financial performance”. Obviously, there are reasons to say that activity based costing plays a vital part in financial performance of organizations. But before stating it, we need to critically analyze the financial performances reports and compare the financial performance of activity based costing and conventional costing methods. From the above examples itself, we can understand how the activity based costing is an advantage for the organization. The real cause of costs is recognized and it is added to the product cost. This method eliminates the chances of miscalculations and hence gives additional profit to the organization. But activity based costing also have some problems like; some costs are complex to allocate during this
Accounting Dissertation Does the activity based costing play a vital part in financial performance? Introduction: Activity based costing is the assigning of expenses of the measures which is the actual causes of expenses. This costing is not the part of costs on the basis of machine hours as in the traditional method…
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Financial accounting is a discipline which has evolved over
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