Wait a second!
More handpicked essays just for you.
More handpicked essays just for you.
Empirical review on activity based costing
Empirical review on activity based costing
Types of business organisation and ownership
Don’t take our word for it - see why 10 million students trust us with their essay needs.
Recommended: Empirical review on activity based costing
This paper is going to identify three type of companies that use different costing systems (job costing system, process costing system, and activity-based costing allocations (ABC) ). Also, this paper is going to compare and discuss the similarities and differences you see in the companies. Deloitte & Touche is one of the well-known auditing and consultation companies that provide services that vary due to thee requests and the needs of the customers.
That means all costs related to the service provided to the customer will be charged on that service and no transfer of the cost of the service to any other stage because services are provided according to the costumers' orders. Therefore, job costing system is the appropriate costing system for Deloitte & Touche .
Wrigley is a company that produces Gum; and it is
…show more content…
Assign overhead costs to the activities identified in step 1.
3. Identify the cost driver for each activity.
4. Calculate a predetermined overhead rate for each activity.
5. Allocate the overhead cost to the product (Heisinger, K., & Hoyle, J, (n.d.), para.12). In summary, the costing system a company adopts is controlled based on the nature of the production process and the link between the production stages. All of the costing systems deal with allocating the cost of material, labor, and overhead. However, the allocating process differs from a company to another due to the nature of the production process and the link between the production stages as clarified above in the applied examples of the job costing system, process costing system, and activity-based costing allocations (ABC). References
Heisinger, K., & Hoyle, J. (n.d.). Managerial Accounting 1.0 | FlatWorld. Retrieved from https://catalog.flatworldknowledge.com/bookhub/reader/4402?e=heisinger_1.0-ch03_s03
Product Cost Flows in a Process Costing System. (n.d.). Retrieved from
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.
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.
An organization costing system is a system that helps the management with the strategy planning while the system plays an important role in providing accurate cost information about the products and customers (Curtin, 2006). UPS utilizes the Activity-Based Costing (ABC) system. ABC assumes that activities cause costs and that cost objects create the demand for activities (Marx, 2009). The key to cost allocation under ABC is to identify the activities that are performed to provide a particular service and then aggregate the costs of the activities (Gapenski, 2012). This is a marked departure from the practice of sharing overheads costs equally or overheads becoming part of the overall profit-loss estimate instead of component product pricing (Nayab, 2011).
should not use the traditional method over the ABC costing method. Although the Traditional method is easier to implement, this method doesn’t take into account that Woodward Farm Inc. uses an automated process in order to produce goods.Therefore in this method, due to the automated process, direct labour hours is most frequently used in order to calculate the overhead cost. Under the traditional method other cost drivers such as quality control and soldering activities would not be accounted for which results in an inaccurate representation of the actual image of the company 's progress. Therefore if traditional method is used to compute the overhead, this could lead to inaccurate and wrong managerial
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.
Process costing System is an accounting expression which describes one method to determine the manufacturing costs to the units manufactured . Processing is typically used when similar units are mass produced. Also process costing system is a type of accounting process costing which is used to determine the cost of a produced inventory. Chartered Institute of Management Accountants (CIMA) defines process costing as " The costing method applicable where goods or services result from a sequence of continuous or repetitive operations or processes. Costs are average over the units produced during the period, being initially charged to the operation or process "( College Accounting Coach, 2007). Process costing is more important and appropriate for all businesses producing identical products during which production is an ongoing flow. Toyota is on the of the major companies in the world that used well-known new philosophic management to produce identical products using process costing system.
Delta Air Lines is one of the biggest airlines in the world and continues to grow, due to the constant innovation they bring. Activity-based costing (ABC) systems have a two-stage procedure often used when companies are distributing overhead costs to the respective product or service. In the first step, the activities are described and the overhead costs are placed into cost pools. In the second step, the overhead costs are distributed to a product line from each cost pool (Hilton). In the figure below, you will see an example of the two stages of the ABC system.
Firms today are trying to introduce activity-based costing into their system, however, some firms are unsuccessful in the implementation, which later result in abandoning the ABC system. According to research, the reason of failure ABC implementation in People’s Bank of China is due to lack of a clear business purpose about the implementation, lack of education about ABC, poor ABC model design, lack of participants, individual and organizational resistance to change, and few outsourcers available. To solve these problems, top management support and cross-functional involvem...
g is an important tool that can help management in making informed decision. Though it is not legally required but still it is necessary to run an entity effectively. Cost accounting is turned toward the future. There are different methods of costing in Cost Accounting: Absorption costing and Variable costing. Both have some merits over the other.
Companies that either produce a product or provide a service must have effective costing systems in order to manage their costs with the objective of making more profit. Among several costing systems out there today, we find Process Costing. Process Costing is a system for organizations to keep track of goods produced and the costs needed to produce them. Generally, the Process Costing system is used when the products manufactured and/or produced are identical or very similar, such as bottles of bleach, tooth paste, hardware tools. Electrical Appliance Manufacturers and Automobile manufacturers typically use Process Costing mainly because almost all products they make are similar and mass produced.
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].
A job order cost system is one in which accumulates cost by individual products. Furthermore, a job-order costing system is utilized for assigning manufacturing costs to an individual product or batches of products. Generally, the job-order costing system is used only when the products manufactured are adequately different from each other. In contrast, when products are identical or nearly identical, the process-costing system will likely be used (Averkamp, 2016).
The technique of using standard cost for the purposes of cost control is known as standard costing. It is a system of cost accounting which is designed to find out how much should be the cost of a product under the existing conditions. The actual cost can be ascertained only when production is undertaken. The predetermined cost is compared to actual cost and the variance between the two, enables the management to take necessary measures.
“Cost is a measurement, in monetary terms of the amount of resources used for the purpose of production of goods or rendering services” - Cost Accounting Standards of ICWA of India
According to Heisinger and Hoyle (2012), job costing is used to record all the incomes and expenses relating to that special product, the unit cost information is derived from the job cost sheet and it involves only one work-in-process inventory account. It is also used for small production jobs, entails detailed record keeping due to the fact that time and materials used for a particular job must be charged directly to the job and the record kept might be used as billing to customers. On the other hand, process costing system is the approach used to