Essay on Activity-based Costing and Abc

Submitted By chingwai
Words: 1795
Pages: 8

The first part of this essay I shall discuss the implementation and usage of activity-based costing (ABC). After that, I shall critically analysis the limitations of ABC. The third part I shall talk about the implementation and usage of activity-based management (ABM) and time-driven ABC (TDABC) and also the advantages of TDABC.

Cost management systems have been radical changed by activity based costing and activity based management. They are not only suitable for manufacturing organizations. But also apply equally to service companies, government agencies and process industries.

Activity Based Costing System was rapidly be used by enterprise since the late 1980’s, developed by Robert S. Kaplan (born 1940). The main reason is that companies want to create greatest value under limited resources. Activity Based Costing is considered to provide more accurate cost information for managers and also a measure of the cost method that can support organizations in order to make a variety of management decision such as strategy decision-making like pricing strategic, profitability analysis and transfer pricing, as well as to find out the operating decision cost such as the cost of the deletion, process improvement, value analysis in order to improve their profit and reduce their cost. It is the process of ABC entails. ABC can be called as a subset of activity based management. It can outline the various expenses such as supplies, salaries and rent to activities to improving the costing, also outlining these activities to services, business processes, products, customers and distribution.

There are a lot of advantages of activity based costing. The main one is ABC can precisely estimate the cost of individual products and service. And also ABC can help to find out any products and activities which are non-profitable, non-remunerative and inefficient that affecting and reducing the profit, then remove it so that profit will increase without increasing the price of the products or activities. The more advantages of ABC extend to helping organizations to adding value to existing products on actual cost incurred basis. In addition, ABC ensuring every item has a better allocation of resources and revealing how much every employee contributes from the product cost to profits when performing management scorecards. Not only revealing the waste and inefficiency products, but also to making possible systematic pricing by decreasing the prices of the products and services and use less activity resources.

Moreover, ABC system innovates costing system with more accurate cost information where costs are assigned to cost objects (Peter B. and B. Turney, 2000). ABC system can accurately estimate the consumption of the activity based on the activity drivers. As a result, ABC system find out and correct the inaccuracy of the traditional system by choosing the activity driver.

However, without the advantages of ABC system, there are a lot of limitations for ABC system to provide the cost information. First of all, based on ABC is a scientific approach, the implementation is complex, and time is consuming and costly. It needs substantial resources when maintaining the process of collect and entry the data. Secondly, the ABC report does not suit to Generally Accepted Accounting Principles (GAAP). Therefore, if enterprises or organizations following ABC system, they need to have two cost systems and accounting books, each is for internal use and for external reports. It is a totally complex work.

Thirdly, another disadvantages of ABC are that some overhead costs are not possible to be divided like head manager’s salary on a per-product usage basis. At the same time, no one will devote 100% of their working hours to the production and also it is not every productive activity add value to the product or process of the firm. In addition, if firms paying too attention to the detail might miss out the whole business environment. It is exactly