In this section of the report, we shall discuss the interlinked processes of Activity Based Costing, Activity Based Budgeting and Activity Based Management by using the help of certain diagrams and also touch upon the evolution of the Activity Based approach over time.
The diagram shown above explains how costs are assigned to a product under the ABC approach. ABC first assigns costs to the activities that are the real cause of the overhead and then assigns the cost of those activities only to the products that are actually demanding the activities.
ABC allocates overheads in a two-stage process. The first stage allocates overhead costs to activity cost pool (Cost Pool A, B or C as shown above). Activity cost pool is the overhead cost attributed to a distinct type of activity. Example of overhead cost pools are ordering materials, setting up machines, assembling products, inspecting products. The second stage assigns the overhead allocated to the activity cost pools to the products (Product A, B & C), using cost drivers for e.g. number of purchase orders, number of setups, labor hours, or number of inspections. (Jerry J. W., Paul D.K., Donald E. K. 2008). The cost drivers measure the number of individual activities undertaken to produce products or provide services. Therefore, they are helpful in order to trace indirect costs to products and in providing two roles for management accountants i.e. assigning the costs to cost objects and explaining cost behaviour.
Activity Based Budgeting is an approach to the budgeting process that focuses on identifying the costs of activities that take place in each area of a business and in determining how those activities relate to one another. The above diagram lays down the link betwe...
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...out the complexity of real operations and accurately assigning costs to products in a way that is in line with the method in which the activities are consumed. As a result, excess capacity costs are not directly assigned to products. Product costs are therefore not distorted by automatically burdening them with the cost of unused capacity. This helps the management take action based on the unused resource capacity. Furthermore, it can scale easily to handle large number of transactions while still delivering fast processing times and real-time reporting.
Therefore, with the increasing success of ABC system the way in which companies operated start changing. This required the budgeting and management system of firms to be in line with activity based approach, thus leading to the implementation of ABB and ABM which were complementary to the successful running of ABC.
The presentation of the material is in dollars only. Overhead is applied to products as a percent of direct labor dollar cost. Factory profit for each year is found by subtracting direct material, direct labor, and direct overhead costs from total sales. The overhead percentage is calculated at the same time budgeting and is applied as a single overhead pool throughout each model year. The consulting company used 435% of direct labor costs in 1987 for their study; the budgeted was actually 437% (OH/DL=107,954/24,682). A similar percentage applies in the following year (109890/25294=434.5%). However in the next two years, after the outsourcing of oil pans and mufflers was enacted, the allocation of overhead in...
Additionally for the next year, Quintana should implement and/or refine an Activity Based Budgeting system. Quintana can first assign overhead costs to cost pools that represent the largest activities for Musimundo. These costs would be related to the purchase, location, and stocking of Music (Music represented 41% of the Musimundo business in 2004).
Budgeting Assignment A company's budget serves as a guideline in planning and committing costs in order to meet tactical and strategic goals. Tactical goals such as providing budgetary costs for daily operations, and strategic objectives that include R&D, production, marketing, and distribution are all part of the budgeting process. Serving as a guideline rather than being set in stone, the budget is a snapshot of a manager's "best thinking at the time it is prepared." (Marshall, 2003, p.496)
If done right, I believe that all of the costs can be allocated to each of the three products through both direct and overhead costs. The only direct costs that are being included currently are labor and manufacturing costs. I broke up overhead into overhead based off direct labor and overhead based on units sold.
Do a further analysis of production costs to improve efficiencies. If all else fails, either increase prices to the point where the contribution margin is positive, or drop the customer. 3. What is the difference between a'smart' and a Managerial Implications and Analysis Limitations Managerial Implications: What are the benefits of Moving from a traditional cost accounting system to ABC can reveal hidden costs and hidden profits on the basis of the identified activities (i.e. customers, orders, etc. ). Treating overhead costs as "fixed" can cause an unfair and highly misleading distribution of overhead costs, which are in fact variable.
Participative budgeting has the advantage of transferring information from the subordinate to their superior This knowledge is likely to be more reliable and accurate as the subordinate has direct contact with the activity and therefore is in the best position to make budget estimates. Participative Budgeting also gives subordinates the opportunity to discuss organisational issues with superiors, in which an exchange of information and ideas can help to solve problems and agree future actions (Nouri & Parker 1998). This transferral of information is important particularly when dealing with a matter of high task difficulty as, the more difficult a task, the greater the need for consultation with subordinates. Participative budgeting has a higher performance rate when dealing with more difficult and more volatile tasks than non consultative budgeting (Lau & Tan 1998)
"College Accounting Coach." Process Costing-Definitions And Features(Part1) « Process Costing « Cost Accounting «. Feb. 2007. Web
The contained paper has been prepared with objectives of elaborating over the three different costing methods namely, Absorption/Full Costing, Variable/Marginal Costing, and Activity Based accounting. The first segment of the report seeks to define and illustrate the costing methods based on the personal understanding of the writer gained through the class room and the academic readings. Part two of the report takes a form of short essay, written critically to evaluate the application of standard costing and variance analysis to any size of business, and concludes with a verdict that whether or not standard costing and variance analysis is applicable to each business with consideration of its costs and benefits of the system.
The overall purpose of cost accounting is to advise top administration and the management team on the most suitable and cost effective methods and actions to employ based on cost, capability and efficiencies of a given product or service. It can be defined as the method where all the expenditures used during execution of business activities are gathered, categorized, examined and noted down (Horngren & Srikant, 2000). Once these numbers are gathered and recorded the information is used to determine a selling price and/or to identify possible investment opportunities. Although the principal aim or function of cost accounting is to help the business administration with their decision making and business planning process, the cost accounting data
Product costs must be transferred from Finished Goods to Cost of Goods Sold as sales are made. This requires a correct and accurate accounting of product costs per unit, to have a proper matching of product costs against related sales revenue.
1.What is the ABC cross model? Define what is meant by the product costing, process costing, and the “what-if” cost-modeling perspectives of ABC.
One of the most important steps in the capital budgeting cycle is working out if the benefits of investing large capital sums outweigh the costs of these investments. The range of methods that business organisations use can be categorised in one of two ways: traditional methods and discounted cash flow techniques.
Others feel that ABC would be more widespread in industry if it were marketed better by the cost accounting profession itself [1]. As the dust has settled, ABC has turned out to be less a revolutionary technique than a useful refinement to proven systems. The costs of products and services must be accurate, or management can be misled. Decisions... ...
Time-phased project work is the basis for project cost control. Work package duration is used to develop the project network. Further, the time-phased budgets for work packages are timetabled to establish fiscal measures for each phase throughout the project. The time-phased budgets are to emulate the real cash needs of the budget, which will be used for project cost control. This information is useful to estimate cash outflows. The project manager's attention is on when the costs are to occur, when the budgeted cost is earned, and when the actual cost materializes. This information is made up to measure project schedule and cost variances (Gray & Larson, 2005). The following are typical types of costs found in a project:
Activity-based costing (ABC) is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” as well as variable costs. Activity-based costing is mostly used for internal decision making and managing activities while traditional costing method is used to provide data for external financial reports. Most organization uses activity-based costing as an addition system for using traditional absorption costing as sometimes the traditional cost system misleads the product’s profitability. In a company, there are many products on sale, if one product is sold at a high price with low product margin and a product with high product margin at a low price, it may result in a loss. In addition, due to the reason that cost drivers and enterprises business may change, activity-based costing analysis also needs to be revised periodically. This amendment should be prompted to change pricing, product, customer focus and market share strategy to improve corporate profitability.