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 pricing, outsourcing and identification and measurement of process improvement initiatives ,allocate indirect cost by using different cost drivers and get more accurate costs in business .Activity Based Costing has been promoted and adopted as a basis for making strategic decisions and for improving profit performance. Activity Based Costing information is now also widely used to assess continuous improvement and to monitor process performance. Activity based costing has now 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 suitable for ABC application, has various products such as lodging, hot spring use and dining which belong to different market segments. The indirect costs of this inn constitute an important proportion of the total costs (53.46%). In such a typical situation, the valuing of products of this inn may be distorted by a traditional accounting system. This article portrays an attempt to apply the ABC model to a hot spring country inn where the managers normally use a traditional accounting method to acquire product cost information. Our case study is presented in the hope of contributing to management accounting research in the non-traditional accommodations area. The Professional Association of Innkeepers International defines that a country inn is a business offering overnight lodging and meals where the owner is actively involved in daily operations, often living on site. The hot spring country inn in our study is located on the Yang-Ming-Shan in the north of Taipei where it faces a very competitive hot spring tour market environment. It includes 6 twin rooms, 9 quad rooms, a hot spring pool for men (7109.2 square feet), another hot spring pool for women (3554.6 square feet) 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 reaches 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 and land in Taipei. This inn doesn't use any activity-based costing method in its accounting system except for the traditional one. Since activity-based costing can be very complex and time consuming, and even less in tourism industry, it is not widely applied in the manufacturing industries in Taiwan. The traditional accounting system here uses direct labour hours to allocate overheads to the three inn products. Cost for a high-volume product should not necessarily be traced based on a correspondingly high level of labour hours, since, in reality, such a product may not consume a proportionally high amount of overhead.
China, Xu Ji Electric Co. Ltd- a large Chinese manufacturing company. Xu Ji is a state-owned enterprise (SOE), turned public limited company (PLC). The company piloted ABC implementation in one of its main production divisions in December 2001, when ABC concepts were at a theoretical level in China (Liu and Pan, 2007). Two more attempts to extend the use of ABC in one of its subsidiaries and sales functions took place in 2005 and 2008. Chinese management styles rely more on managing people and relationships Chinese management ethos than on technological systems and management tools. The level of office and accounting computerisation and IT-enabled business solutions is not as advanced as those in the west. Xu Ji started 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. The main achievements of Xu Ji's ten year ABC endeavour are that ABC radically changed the SOE, turned PLC's traditional costing systems and induced standardisation in their working practices and processes. ABC also acts as a catalyst to Xu Ji's IT developments - first accounting and office computerisation and later the ERP implementation. One distinctive feature of Xu Ji's ABC experience is the "topdown" instigation and enthusiasm of trying out innovative ideas and inducing corporate-wide learning. While such a "top-down" 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 Xu Ji, 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 1997, Thailand faced an economic crisis during which some Thai corporations decided to change their management practices and technologies in order to increase their competitive potential in global markets. Since then, most Western management concepts and practices have been widely adopted. During the 1990s, Thai companies adopted ABC because it provided an effective costing system.Only a few studies have explored why companies adopt ABC and how well it works in the overall context of developing countries such as Thailand this study used a case study of a Thai telecommunications company to indentify factors influencing the process of ABC implementation by using in-depth interviews with six key personnel in the company. ABC concepts will be adopted by Thai companies and other developing countries, as a means of increasing their global capacities and competitive advantage. Few studies have been conducted in developing countries such as China, Taiwan, Malaysia, and Thailand These studies focus on few factors influencing ABC implementation such as behavioral 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 few 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 percent 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 profitabilityto their companies.It will be more famous for services industries in their future.
