Activity based costing is a costing method. The basic principle of Activity Based Costing is products consume activities and resources consume activities. Activity Based Costing used to support prices, outsource, identification and measurement of process improvement measures, allocate indirect cost by using different cost drivers and get more accurate costs in business .Activity Based Costing already promoted and adopted as a basis for making strategic policy decisions and for improving profit performance. Activity Based Costing information is now also widely used to evaluate continuous improvement and to monitor performance of the process. Activity based costing maintained a high profile status as an important management accounting innovation for well over a decade. Activity based costing has gained a high profile in professional and academic journals and textbooks in management accounting as a technique which improves the accuracy of product/service costing and also assists managers in understanding how resources are used across a firm's value-chain to deliver strategic outcomes. It is attractive to firms in competitive environments that demand continuous cost reduction, particularly where existing cost systems fail to provide such decision support. However, while many organizations are aware that technology and the global economic environment have made traditional cost accounting systems less relevant, they need to perceive net benefits before implementing Activity based costing, given that restructuring the necessary systems can be significant and costly.
Activity based costing and Traditional costing symbolises two competing product costing methods. Traditional costing approach is where only the unit-level drivers assign costs to products. Activity Based Costing is an alternative to the traditional treatment of overhead costs. Activity Based Costing recognizes that many overhead costs vary in proportion to changes in activities, rather than the measure of production volume utilized as the absorption base in the traditional system. By identifying the "activities" that cause costs to change and thus assigning costs to products on the basis of the "cost driver" usage, it is claimed that Activity Based Costing can more accurately measure the resources consumed by products. This cause and effect relationship provides a superior way of determining relevant costs. Furthermore, it is claimed that Activity Based Costing can be used for a range of cost management applications such as value chain analysis, customer profitability analysis, and business process management. The purpose of this study is to measure the improvement in financial performance that is associated with Activity Based Costing use. This study tests the association between improvement in financial performance and previously used measures of Activity Based Costing efficacy. this study tests a specific measure of improvement in financial performance, as opposed to unobservable general constructs such as perceptions of "success," "satisfaction," or "financial benefit."
Countries using Activity Based Costing
Taiwan, hot spring country inn style- The country inn style of non-traditional lodging, especially applicable for ABC appliance, has a variety of products for different market segments, such as accommodation, the use of hot springs and dining. The indirect costs of the hotel is a significant proportion of the total costs (53.46%). In a typical case, the value of the inn may be distorted by the traditional accounting system. This paper attempts to describe applications ABC model to the hot springs country inn where the managers usually use the cost of the product obtained by the traditional method of accounting information. The Professional Association of Innkeepers International defines that a country inn is a business accommodation overnight lodging and meals where the owner is actively involved in in the day-to-day operation of the business, often living on site. The hot spring country inn located on the Yang-Ming-Shan in the north of Taipei where it faces a very competitive tourism market environment. It includes 6 twin rooms, 9 quad rooms, a hot spring pool for men, another hot spring pool for women and 9 private hot springs bathrooms, covering a total area of 1 acre and 31076.45 square feet. This inn hires 25 full time employees and 13 part time employees, and the owner who also lives there is the general manager. Meanwhile, the inn faces very serious seasonal customer fluctuations. The average volume of customers for hot spring use can come to a maximum of 58,048 persons monthly in the winter season and a minimum of 18,311 persons in the summer season. In addition, this hot spring country inn bears a heavy space and land costs due to the high cost of buildings, especially it land in Taipei. This inn does not use any of its accounting system in addition to the traditional activity-based costing methods. Based on activity-based costing can be very complex and time-consuming, even in the tourism industry, it has not been widely used in the manufacturing industry in Taiwan. The cost of the product is not necessarily a high capacity to be tracked based on the corresponding high level of labour time, because, in reality, such a product may not consume a high proportion of the amount of overhead.
China-The company in China used ABC implementation in one of its main production divisions in December 2001, when ABC idea were at a theoretical level in China. Chinese management styles depend on more on managing people and the relationships of Chinese management famous than on technological systems and management tools. China started their ABC from a very basic level, building financial accounting systems and office computerisation before implementing the ABC system which captured direct costs and variable manufacturing overheads before processing. ABC acts as a catalyst to China's IT developments - first accounting and office computerisation and later the ERP implementation. One distinctive feature of China's ABC experience is the instigation and enthusiasm of trying out innovative ideas and inducing corporate-wide learning. While approach is not so popular in the west, it is fairly common amongst SOEs, particularly in the northern part of China. This approach worked well in China, allowing them to move quickly from imitating western ideas to developing their own independently developed Relay's ABC system and make informed decisions using sales activity analysis.
Thai Telecommunications Company- In year 1997, Thailand faced an economic crisis, some Thai corporations decided to change their management practices and technologies to increase their potential to compete in global market. Most Occident administration notion and behaviour had been adopted. Thai companies used ABC because it has an effective costing system. Only some studies have explored why companies used ABC as well in works overall the context of developing countries such as Thailand. Thai identify factors influencing the process of ABC implementation by using in-depth interviews with six key personnel in the company. ABC idea will be used by Thai companies and other countries, as increasing their global ability and competitive strength advantage. Some studies have been conducted in developing countries such as China, Taiwan and Malaysia. These studies focus on some factors influencing ABC implementation such as behavior factors and organizational factors. They disregard other important factors such as contextual and technical factors. And they are lack of examination on the process of ABC implementation or the link between factors influencing the process of ABC implementation. Especially, ABC studies in Thailand, only some studies have been found. They were based on surveys, focused on few factors and a lack of examining process of ABC implementation.
Canadian- There are two sources of criticism-practical and theoretical. Practical and theoretical material supporting criticism of ABC that is available to be cited by textbook authors and review coverage in five Canadian textbooks. Recent surveys find that as little as 18% of firms use ABC and while user satisfaction levels are generally moderately positive, many users think that ABC is not worth implementing. In addition to survey evidence that acceptance of ABC is far from universal, and perhaps more important, there are theoretical challenges to ABC related to the assumptions it requires. It would be surprising to find criticism of ABC in a textbook published around 1990 because ABC was made very popular in the 1980s. It would be less surprising to find direct criticism of ABC in textbooks published after 2000 because events in the intervening decade exposed its faults.
Conclusion
Activity Based Costing is become more important now for companies and in services industries. As a future step a software package based on this methodology can be developed that would trace overhead cost to products accurately, at low cost, and in short time. Using Activity Based Costing makes this kind services companies reduce and control their costs in order to make suitable pricing, and to make more profitability to their companies. It will be more famous for services industries in their future.
