ACTIVITY BASED COSTING
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Final Paper: Your final project is to prepare a 6- to 8-page paper on this topic related to managerial changes within an organization. Since an organization's costs are really considered proprietary information and very difficult to find, doing a paper strictly on the cost accounting system and costs of the entity would be almost impossible. Thus, other topics must be used. As well as picking a topic, you must also find an organization that actually changed to or adopted the managerial concept.
TOPIC- Activity based management or activity based costing. We briefly studied this topic during the course. A more in-depth study will reveal the benefits an organization can reap from changing to an ABC costing system. Organizations typically adopt ABC for a small portion of the organization before turning the whole organization over to the method. Some firms found it didn't work for them. Many service organizations have successfully implemented ABC.
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Solution Summary
This compares the ACTIVITY BASED COSTING with the traditional costing
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Advantages of Traditional Costing Method Disadvantages of Traditional Costing Method
? Valuable in the creation of financial statements because of its simplicity and consistency?which is well understood by auditors
? Accounting purposes?used to value inventory for financial statements
? Misleading tool for effective managerial decision making
? There is little true knowledge of product cost, which is demonstrated by the arbitrary application of overhead
? The arbitrary application of overhead, the largest component (sometimes more than 50%) of cost, means that there is little true knowledge of product cost.
? Does not apply overhead to purchased materials, parts and assemblies which distort projected cost reduction analysis
? Changes in the product mix can lead to dramatic cost changes which cannot be predicted accurately by this method
? Does not provide guidance to managers on the effect of sales, marketing, distribution and customer costs on product or product line profitability
For what type of business cases were traditional costing systems designed? Why is it not a traditional costing system appropriate for today's companies? Traditional costing systems were designed for companies which:
§ Had homogenous products
§ Large direct costs as compared to indirect costs
§ Limited ability to collect data
§ "Below the line" costs
Activity-Based Costing (ABC) is an accounting technique that allows an organization to determine the actual cost associated with each product and service produced by the organization without regard to the organizational structure. Activity- based costing can be used to identify discrete activities as well as identifying the primary output measure for each activity. With using activity-based costing there are value added-activities and non- value added-activities. Value added-activities are activities which customers are willing to pay for or show that after the process there will be a profit. Non- value activities are activities which customers are not willing to pay for or activities which do not show future profit. The activities must be analyzed in order to decide what will be a productive measure. When using activity-based costing an organization can measure costs against individual activities. With seeing what the results are, the company can figure out if there can be an adjustment made to create a value added-activity. If the activity turns out to be a non-value added-activity the organization may decide to delete the activity all together.
Activity-Based Costing is a more accurate cost management methodology. ABC will allow us to focus on indirect costs, including our overhead. We can trace our expense category to a particular cost object rather than to allocate it. Using this process will also help us make indirect expenses direct. Activity-Based Costing is a costing model that identifies the cost pools, or activity centers, in an organization and assigns costs to products and services (cost drivers) ...
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