Activity-Based Costing ( ABC ) Summary The business environment in the 1990s is markedly different from that of the past when conventional cost accounting procedures were established. Activity-based costing (ABC), pioneered in the late 1980s, offered a new costing approach consistent with the changed environment. However, ABC did not diffuse rapidly into the business community. This article demonstrates why adopting ABC is important by documenting the potential of ABC in supporting contemporary managerial decision making. Introduction Everything happens faster in business today. Even new management tools (some say "fads") follow a meteoric path. For example, the ink on new articles describing activity-based costing (ABC) was hardly dry before consulting firms had integrated it into their slick brochures and presentations. All they needed was someone to use it. To illustrate, Romano identified only 110 installations by August 1990, nearly two years after the procedure was developed, with 77 percent of these in two major firms [13]. Perhaps this phase, in the process of introducing the new procedure, could be called "the period of wild over-promise." However, even by the mid-1990s, ABC has not spread widely throughout the industry and "even in large firms, widespread success of ABC is not obvious" [16]. According to Ness and Cucuzza, "thousands of companies have adopted or explored the feasibility of adopting ABC. However, (they) estimate that no more than ten percent of companies now use activity-based management in a significant number of their operations" [11]. A survey conducted by the Institute of Management Accountants' cost management group found that only 29 percent of companies used ABC instead of traditional systems, but this was an increase from 25 percent in the previous year [10]. Among reasons cited for low adoption were employee resistance and major organizational changes required with the use of ABC [11]. Some trace the source of slow adoption of ABC to technical as well as cultural issues [5]. 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... ... middle of paper ... ...8. Lewis, R.J. "Activity-Based Costing for Marketing." Management Accounting, November 1991, pp. 33-38. 9. Lofgren, G.Q. "Quality System Registration: A Guide to Q90/ISO 9000 Series Registration." Quality Progress, May 1991, p. 37. 10. "More Companies Turn to ABC."Journal of Accountancy, July 1994, p. 14. 11. Ness, J.A. and T.G. Cucuzza. "Tapping the Full Potential of ABC." Harvard Business Review, July/August 1995, pp. 130-131. 12. Port, O. "Custom-Made, Direct from the Plant." Business Week, November 18, 1994, p. 158. 13. Romano, P.L. "Trends in Management Accounting." Management Accounting, August 1990, pp. 53-56. 14. Roth, A.V., C. Gaimon, and L. Krazewski. "Optimal Acquisition of FMS Technology Subject to Technological Process." Decision Sciences, Vol. 22, No. 2, Spring 1991, pp. 308-334. 15. Schonberger, R.J. and E.M. Knod Jr. Operations Management: Continuous Improvement. Richard D. Irwin, 1994, p. 44. 16. Selto, F.H. and D.W. Jasinski. "ABC and High Technology: A Story with a Moral." Management Accounting, March 1996, pp. 37-40. 17. Smith, R.B. "Competitiveness in the '90s." Management Accounting, September 1989, pp. 24-29.
[4] Colin Drury, Management and Costing Accounting, (7th edition), Chapter 3, Cost Assignment, p. 54-59
Works Cited The Allbusiness Web site provides answers and articles about corporations. http://www.allbusiness.com Retrieved May 22, 2011. Mallor, J., Barnes, A.J., Bowers, T., & Langvardt, A.W. (2010). The 'Standard' of the 'Standard'.
At the outset, any organisation requires details and analyses while adopting ABC system as an ongoing system. Due to the rapidly-changing technological environment, the ABC models are proactively required to be updated in order to escape from obsolete and irrelevant information. However, the cost of updating that information is very expensive (Langfield-Smith, Thorne, Smith, & Hilton, 2015). If the ABC system is meant for activity management and product costing purposes, then the level of complexity will escalate significantly because such costing system entailed a vast analysis of costs and activities (Weygandt, Paul, & Donald, 2015).
Marshall, M.H., McManus, W.W., Viele, V.F. (2003). Accounting: What the Numbers Mean. 6th ed. New York: McGraw-Hill Companies.
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Bryne, John. "Management's New Gurus." Bloomberg Businessweek. N.p., 30 Aug 1992. Web. 17 Feb 2014.
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.).
"College Accounting Coach." Process Costing-Definitions And Features(Part1) « Process Costing « Cost Accounting «. Feb. 2007. Web
Garrison, R. H., Noreen, E. W., & Brewer, P. c. (2010). Managerial Accounting. New York: McGraw Hill/Irwin.
Sulaiman, M., Nik Ahmad, N. N. & Alwi, N. M., 2005. Is standard costing obsolete? Empirical evidence from Malaysia. Managerial Auditing Journal, 20(2), pp. 109-124.
From the A12 redesign proposal, it shows that the current standard cost system is unable to link the reduction in the number of parts to activity reductions and cost savings. The labor-direct-based standard cost system reflects the cost of A12 is distorted. Using the ABC system, according to the activities of A12 allocate the overhead cost to A12 that could find that the current overhead cost of A12 was overstated by the standard cost system. At last, A12 Junction Box could be identified it is an attractive and profitable product, at the same time, it demonstrates the value of ABC.
Heisinger, K., & Hoyle, J. B.(2012). Accounting for Managers. Creative Commons by-nc-sa 3.0. Retrieved from: https://open.umn.edu/opentextbooks/BookDetail.aspx?bookId=137
Marshall, D. H., McManus, W. W, & Viele, D. (2002). Accounting: What the Numbers Mean. 5th ed. San Francisco: Irwin/McGraw-Hill.
Cost accounting system has two types, job order costing, and process cost system. These two cost systems are very different, almost every company uses order costing or process costing. Starbucks, is a coffee shop where citizens congregate to drink there morning coffee, study, and or socialize. Starbucks is one of the oldest and largest privately held specialty coffee retailer in the United States. (Starbucks) Their passion is to discover the flavors you love and always bring it home, delivering the look, taste and aroma of the world’s best coffee and teas. Job order costing is a very easy way in order to help Starbucks managers to know how much profit their company (Starbucks) made.
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.