An analysis of Activity Based Costing

Category: Accounting

Activity Based Costing(ABC) is an accounting method that enables businesses to obtain data about their operating cost.ABC enable costs to be determined to specific activities or project for instance, marketing, planning and even manufacturing and then link the activities with the products or services. It therefore, enables the business to determine which product or services are increasing their profit or loss. This paper therefore seeks to critically asses, analyse and integrate the importance and impact of Activity based Costing in modern business.

The common ground is that most companies in this world of capitalism always want more. They want more profit, more shareholder value, and more market share, among others. The realizations of these objectives have been attained through the successful implementation of (ABC) process in the businesses. According to Benjamin , Siriwardane and Laney, (1994) ABC involves Activity Based Management (ABM) to allow manager to examine non-value added activities and make rational decisions to eliminate them. This is critical in maintaining profitability of the business as manager are involved in identifying products ,services and departments that are not performing according to the cost allocated. Hence when this inefficient products and services are starved off resources, the resources are then allocated to more profitable product and services.

A congregation of literatures abide in the fact that the recent economic downturn had far reaching implications on the cost of running business. Anderson (2009), in his work "Activity Based Costing in Project Management" has given groundbreaking analysis on the business cost and structure decisions for a organizations to take during the times of economic recession The most popular decision and reaction reducing running cost of business ,either by dropping staff position or starving inefficient department off funds.

He further emphasizes the need for businesses to focus on improvement process based on ABC not only as accounting methodology but a cost management too in the operations of business.

In the analysis of customer relationship management, Clark (2009) emphasizes the importance of improving customer loyalty in the midst of harsh economic situations. In the economic downturn many businesses turn their focus and resources to existing customers rather recruiting new one. It becomes expensive affair advertising, lowering of prices and offering gift hampers to attract new customers. hence ABC becomes an excellent methodology of separating profitable customers and just normal customers.ijn this regard ABC also does help business to analyze the market and figure out ways of raising profit without necessarily raising prices of products and services (Cooper, 2007). it is imperative to note that in this dynamic technological changes firm have to come into terms traditional costing accounting system does not give precise cost information, therefore leads to making wrong decision on pricing, products and services . Due to lack of accuracy on cost accounting (ABC) is gaining popularity because it focuses on the activities associated with cost and assign costs by using multiple drivers (Stapleton 2009).ABC therefore, enables manager to better understand the aspect of profit, hence make marketing decision from a well informed perspective of accounting and cost involved. The increase of ABC has been necessitated by the rapid increase in the manufacturing cost in many firms, this mainly because of the unstable oil prices all over the world and increase cost of leaving. It has became extremely important for firms to be able to trace services, product ,manufacturing, management marketing and projects costs to enable mangers have advantage in making well and thought decision for improvement process (Leary and Roberts, 2011).

Effective ABC management strategies in harsh economic times have however been presented by Gottfredson and Puryear (2007) who asserts that firms must define their marketing terms within the context of their operational cost and the prevailing market situations. Whereas the terms of the definitions differ, it be discerned that costing efforts in harsh economic situations must be customer focused and cost effective to the organization. In addition to the above, ABC must aide the fact that the effective costing as a process, not an event in an organization and demands careful allocation of resources. ABC is not a method of costing, but a technique for managing the organization better Warner (2008) It is one of the crucial exercise that must be integrated in an organization since it help s to measure performance of activities and resources to generate accurate information to help in decision making. According to Johnson (1990), When ABC is well integrated in an organization with performance management, ABC acts as a primary source of data of measuring performance. Although ABC as a method of costing has been advanced as effective and efficient, it comes with some limitation in terms of implementation. Critics says that it is hard to place costing on some expenses such as directors salaries, this are cost that are not and cannot be assigned to products or services. ABC is also considered to a more expensive accounting method which small manufacturing firms cannot bear the cost of operating., has classified the costs of successfully implemented ABC programs into three major categories, that is, direct, indirect and intangible costs (Yousef, 2010). The direct costs include program start up and operating costs of personnel, facilities, equipment, management and the value of the time spent by employees.

In conclusion, it can be noted from studies and journal written on ABC that ABC has been relatively been slow to gain acceptance in many organization hence left to big company and government agencies.ABC methodology was picked to be more related with the size of an organization Finally ABC was found to be a tool for supporting management in making policies changing decision accurately.