What Is The ABC Accounting Essay

Published: October 28, 2015 Words: 1469

According to Cross, activity-based costing is designed to precisely assign to job costing all appropriate support. Activity Based Costing struggles to accurately assign appropriate direct and support costs to jobs while creating cost visibility of important processes. Cross defined that while many printing company executives believe that the information ABC systems defer is useful, they fear that the system is impractical because it requires an enormous amount of record-keeping. Nevertheless, in view of Cokins the Activity-based costing widely known as ABC was essentially developed in USA by Robert S.Kalpan and Robin Cooper in 1980, due to the reason that in early 80s limitation of the traditional costing system started developing enormously and universally. Moreover, identification that after many surveys it was proved that traditional conventional method is not always giving accurate costing. This basically happened because traditional costing system was primary designed decades ago when companies mainly had a small range of products, labour and materials. Therefore overhead costs were relatively small and overhead allocations was not that much significant. Hence the fundamental philosophy behind the ABC is to fulfil the requirements that traditional method is unable to do. In general words, we can say that ABC is costing approach is the method that identifies activities in the company or organization based on the products, labour and services according to the actual consumption by each. Thus it is methodology which distributes indirect costs (overhead) into direct costs (products, labour, service etc.) compared to traditional method. This happens in order to simplify and help management to understand the crucial business information. Some principal methodology of the ABC listed below in order to give better idea of the particular area. However, mainly ABC is divined into the stages: relate overheads to activities, identify different activities, spread support activities over primary activities, determine activity cost drivers and calculate activity cost driver rates. Based on that we can say that in order to achieve proper ABC method you need to follow some basic steps such as: identify activities responsible for indirect production cost, identify cost for each activity, determine what generating each cost, establish the cost driver rate for each of the activity, and last to apply this rate to each product. Furthermore, unit level activity, batch level activity, product level activity and facility level activity are the four main categories which are important part of ABC, according to Lisa. Furthermore, deep literature survey it was discovered that ABC is met the expectations and gave more accurate costing of individual products. As well as better understanding of costs and coding, initiate some new ways in strategy, reduces the unprofitable businesses etc. But as any alternative it has some disadvantages such as time consuming, requires education, collection of huge amount of data and regular update which is time and cost consumer.

Assess whether Food4u could use this method of costing:

In the case of Food4u switching from traditional method to ABC should be very beneficial. In accordance with given summary about Food4u we can mention that it is massive manufacture, so we can assume that they have educated professional staff what is required for ABC and solved all the insufficiencies of ABC. The fact that business is rapidly growing says us that staff is strongly motivated (probably due to the high cash/direct labour hour) what ensures the ABC to work properly as it is favorable condition to it. In addition it was mentioned that MD annoyed and confused due to some miscalculations of her management accountant. This is more likely due to the fact that manufacture with these high direct costs still uses traditional costing method which as mentioned before is not always accurate in cases with high amount of direct costs. Moreover ABC provides better understanding of costs and coding which will solve MD questions referred in part 4 and 5 of the summary. Therefore to conclude, we believe that ABC in Food4u will act beneficially in all aspects and increase profits as well, if production will be monitored and supervised properly in order to avoid inefficiencies

The problems associated with the implementation of ABC

The system implementation is ABC one important task that requires substantial resources. When you apply an activity base costing system that is costly to maintain. The elements concerning numerous measures activity should be collected, checked and entered into the system.

ABC produces numbers as margins product that are different to the numbers produced by the traditional systems cost. But the officers are familiar with your use of traditional measures costing to run their own business and traditional systems usually costive been using the performance evaluation

Activities based on cost data that can easily be misinterpreted and should be used with caution when've been using the decision making process. Costs associated with the products, customers and cost objects are probable. Anybody taken before taking important decisions with activities based costing elements, managers must identify which costs are much need to thoroughly for decisions.

The reports generated by this system do not meet the generally accepted accounting principles (GAAP). Internal use and one for preparing external reports.

Problems with implementation: One of the major problems with cost proportional system activity is the execution. This is not a system that you can easily implement. One important need of the resources and a large commitment of your staff. Must receive continuous measurement of productivity and efficiency throughout the production process. Most companies do not have the time or resources necessary to implement a fixed activity-based costing system that will actually work.

Changing Habits: Another problem with the use of activity-based costing method is that it may be difficult to change the habits of government officials and staff. Numbers produced by this method vary significantly compared to other systems are costly. When your senior executives used to use other numbers may fall not want to switch to the new system. When you go to change may be familiar with how the new one to use information effectively.

Not Suitable for formal reporting: Using the proportional activity costing is a method that is usually useful for internal controls and decision making. Although it may be useful for this process, usually not suitable for formal report. Does not provide the kind of data needed to create public financial statements. This means that there will be another more formal costing method. This puts more work on the part of businesses and gives you inside information.

Requires absorption costing: Order to make an activity-based costing working method you should use a process absorption costing, when you it comes to allocating costs to products. By absorption costing, must include all the variable and fixed costs in unit cost of each product. If you would prefer be separated from the variable costs and fixed costs, this approach will not be of value to your company. A number of companies prefer not to use absorption costing method.

An appraisal of the business benefits of implementing such a system

There are several advantages to using the activity based costing system. First of all using this type of system for the determination of costs associated with products or company itself manufactures the individual activities within the process of production will be assessed based on their own use of resources in return will allow one greater expensive to be included on the costs associated with each activity. Additionally using the activity based costing system, the firm can identify high operating expenses from the individual unit and the ways that may be available to reduce these costs. For the detection of activity that is responsible for the increased costs, can then be passed on to users only when product makes use of the activity. Finally an activity-based cost system may contribute to the future planning of the product. in this sense the activity based costing can determine all of activity costs associated with the new product and before booting the pricing of the product can be determined as well as other expense.

Identifies all overheads caused by the same activities. We can easily identify the drivers of costs, allowing it to check through the source of cost.

Activity-based costs can help to identify profitable products, services, processes, activities in field service, distribution channels, contracts and projects. This will help in making the price, product, and service combinations decisions.

Activity-based cost enables continuous improvement. By measuring and examining the costs and cost drivers and the various processes and activities can make improvements. For example, knowing the guide costs, cost reductions can be achieved either by means of outsourcing certain activities or apply to different areas of the value chain sectors.

Helps with future planning of products for example the costs of contribution activities related to a any product or service can be accurately determined before to launch. This can then helped by fixing the price.