4.0 STRENGTH AND WEAKNESSES OF ACTIVITY BASED COSTING
4.1 Strength of Activity Based Costing
4.1.1 Measures profits more precisely
An organization can make better company strategies decisions on product lines, product mix, market targeting and market segmentation and pricing with precise and systematic information on product cost.
4.1.2 Make better business decision
ABC builds a clearer relationship among varies activities and the activity-driving costs. With this decision-making tool, it helps the managers to upgrade and develop the product and services that satisfy customer needs to deliver superior customer value. It also reduces unnecessary expenses in order to increase the margin profit.
4.1.3 Cut cost
The costs of every single activity performed during manufacturing is highlighted in order to identify the expenditure which be eliminated.
4.1.4 Lessen Cost Distortion
The costs related can be assigned more equitably for each individual jobs or products. In ABC Costing, the allocation of indirect cost is based on the kind of product activities and the range of the activities organized.
4.1.5 Match the manufacturing overhead costs with the product better.
The effectiveness and efficiency of each department in the company can be improved with better matching of the manufacturing overhead costs with the products. The costs differences between departments and the usage difference between jobs-better jobs of matching each department’s overhead costs to the products that use the department resources can be determined
4.1.6 Make better cost estimation of individual jobs or product
The cost of individual jobs or products can be determined more accurately by using ABC costing system. It is essential to make a good business decision ...
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...workable decision.
4.2.5 Additional work
The company needs to sustain two cost systems and accounts, one for internal use and another for external reports since the direct use of accounting method in analysis of the ABC data cannot be used. Different reports are required to prepare for different purposes in ABC costing lead to additional works that making the resources not using productively.
4.2.6 Lose sight of strategic objectives
The company might neglect their strategic objectives in their business as they pay too much attention to small, less important details. ABC costing makes the managers concentrates more on the allocation of costs on individual jobs, less on the overall allocation of budgets and resources. Excessive concern about the small savings would lead to huge losses in long term if the company benefits and business target are always ignored behind.
Activity-based costing (ABC) is a costing method that is usually used as a supplement to a company’s usual costing system, and is therefore used for internal decision-making. It is designed to inform managers of costing information for decisions (strategic and others) that potentially affect capacity and consequently “fixed” as well as variable costs. In addition, ABC can also be used to pinpoint activities that would benefit from process improvements.
Based off of the data provided in the case study it would appear that under the traditional costing. Which are the cost that were incurred to produce OS-367. It appears that those cost were being allocated to GS-157 and HS-241. The cost per unit for OS-367 was $10 under the traditional costing system and the same has become $13.75 under the ABC system.
Roybal, H., Baxendale, S.J., and Gupta, M., (1999), “Using Activity-Based Costing and Theory of Constraints to Guide
John Deere Component Works (JDCW), subdivision of John Deere and Co. was in charged specifically of the manufacturing of tractor component parts. The demand for JDCW’s products had problems due to the collapse of farmland value and commodity prices. Numerous and constant failures in JDCW’s competition for bids, alerted top management to start questioning their current costing methods. As an outcome, the analysis has to be guided to research on the current costing methods with the intention of establishing legitimacy and to help the company in adopting a more appropriate costing system.
Wilkerson Company is facing fierce competition in the water purification equipment business that could potentially cannibalize their sales. In matching the lower prices set by the competition, Wilkerson’s profits and pre-tax margins have declined as a result. Despite lowering the prices of pumps, which are Wilkerson’s major product line, the product’s gross margin has fallen under 20% - which is 15% below the company’s expectations. In light of these challenges, Wilkerson Company decided to examine their overhead costs.
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.
Since more than 40 years, Toyota Company was thinking how to develop the traditional process costing system and the production system. Some of the companies believe that the increasing of the production is a big profit, while Toyota proved the opposite. The more you increase the products out of the need of the market, the more losses you are going to gain. This kin...
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.
As such, there is material cost regulator, manufacturing control, labor cost regulator, excellence control and so on. Conversely, control over the price is implemented through the methods of financial control and typical costing (Meigs, 1998). The control methods aid the management in understanding the operating competence of a firm. Cost accounting also determines the selling price. The intention of all business firms is minimizing costs and maximizing profits. The costs incurred in producing goods and services may be reduced through incorporating alternate but cheaper resources of
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.
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... ...
...pplied. Cost estimation and analysis could ultimately determine major decisions in both the business and political worlds today, and play a crucial role even in our day to day lives. Through activity based costing one is able to see what areas need improvement and also whether or not a business will be successful after considering all the factors. These tools are very powerful in drawing wise conclusions from cost analysis and can be a priceless tool to have even in the field of engineering.
The second way is to achieve low direct and indirect operating costs is gained by offering high volumes of standard products and offering basic no-frills products. Production costs are kept low by using less parts and using standard components. Limiting the number of models produced to ensure larger producti...
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.