Accounting for Decision Makers -Discussion Question - Essay Example

Activity Based Costing (ABC) and Profitability Analysis ABC entails a costing approach that illustrates organizational activities, and allocates the cost of every activity based on the resources for products and services based on actual consumption levels. The costing methodology allocates more indirect costs to the direct costs, than the conventional costing approaches. The ABC approach traces the resource consumption levels, and also ensures the costing of the final outputs. The resources are allocated to the activities, and the activities are allocated to cost objects according to the consumption estimates (Kaplan & Bruns, 2012).

The ABC model enables business organizations to adequately approximate the cost elements applicable to the products, activities and services. The cost elements enables business organizations make appropriate decisions. One decision entails identifying products and services that are loss generating or less profitable. The second decision entails removing the service and product which are ineffective, and ensure processing approach which results in better yielding products and services. ABC analyses the product and consumer expenses and also profitability, according to the production and the performing processes.

Thus, ABC has the applied in supporting strategic business aspects like; pricing, outsourcing, and also the process improvement approaches (Hartgraves & Morse, 2015). ABC illustrates; fixed costs, variable costs, and overhead costs. The cost split illustrates the cost drivers. For example, in operating machines, the main cost driver is the machine operating driver. This is because the machine operating hours greatly influences the labor, power and also machine maintenance costs. ABC is effectively used in routine business processes.

ABC ensures allocation of adequate resources to the profitable products and activities, resulting to enhanced profitability levels. ABC also ensures the removal of unnecessary costs, and this improves the revenues generation levels of the business organization (Hartgraves & Morse, 2015). ReferencesHartgraves, Al L., & Morse, Wayne J. (2015). Managerial Accounting (7th ed.): Cambridge Business Publishers.Kaplan, R. & Bruns, W. (2012). “Accounting and Management: A Field Study Perspective.” Harvard Business School Press.