ABC Costing system Name Institution Date An explanation of ABC costing system Activity Based Costing – ABC costing approach is a type of management accounting method that has greatly helped a lot of companies to improve on their cost structure and profitability…
83). For you to be able to compete in the marketplace, management must change to the cost and profit management and the reporting approaches. Activity Based Costing is known as a management accounting approach that is able to allocate overhead (direct and indirect costs ) to cost objects (services and products) so that it can help management comprehend and understand critical business information. ABC is able to allocate direct and indirect costs to services and products based on the level of activities that have been used to create and deliver those products and services. Various activities such as design , purchasing, production, sales, customer service and marketing are utilized by different services and products (cost objects) with regard to their complexity and business requirements. If compared to traditional accounting, Activity Based costing is a decision making tool that provides more accurate results of cost and profit information thus allowing management to understand the cost and profit drivers so that you can improve your business. What the method is intended to do, a comparison with the traditional method The objective of the ABC costing system is to offer a better understanding of the overhead/ indirect cost and profitability. ...
For instance,the cost of each department and activity is analyzed on the basis of the company’s business model . This ranges from, number of hours hat the employees work, the number of machines and the number of shifts. Both product and services companies are able to use the ABC costing system to assign the cost of activities to the products and the services that they offer to measure profitability. Activity Based Costing (ABC) emerge as a better way of handling cost and profit in the 1980s as a result of the lack of relevance in the traditional costing accounting methods. This method of accounting was established in the early 1990s. In those days, the industries were labor intensive and there was no automation. This meant that the overhead cost of the companies was quite low and product variety was small as compared to what they obtain these days after he started using ABC. DRURY (2007) claims that after most of the companies implemented Activity Based Costing they came to realize that a lot of information was being overlooked and that is why their production was quite low (pg. 57). In traditional accounting, it is assumed that the cost objects are supposed to consume resources but, in ABC costing, the cost objects are supposed to consume the activities. However, traditional cost accounting more often than not utilizes volume related allocation whereas ABC used the drivers at various levels of production. The traditional accounting method was more of structure oriented but ABC is more of a process oriented. In the diagram below, it is evident that ABC brings comprehensive information from the activities up to the assessment cost and manage capacity at different levels but the traditional costing ...
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