Consider the following statement: “Activity-based costing is just another inventory valuation method It isn’t relevant for making operating decisions.” Do you agree with this statement? Explain.

Activity Based Costing (ABC) has been discussed elaborately for allocating costs to services or products and the different steps involved in the process. The recommendations made in this paper could be used by the users as guideline for charging the fixed and variable costs of one department to other department of the organization (Peter B.B. 1997). A number of indirect overhead manufacturing costs can be turned into direct costs by using activity based costing systems. They can only sustain in this competitive world if they adapt to a mechanism of calculating costs which is more than accurate.

Dell, for example, a PC manufacturer, has a website which lets customers specify their own PC in terms of memory size, capacity, processor speed etc. That information is then fed into their automated production system and the specified computer is built, more or less automatically. Table 1 has been amended to include the fixed overheads to be absorbed in both products. A vital new resource, Time-Driven Activity Based Costing gives you the tools and examples you need to maximize the value of your activity-based costing system.

How the ABC system improves the costing process?

Remember, the title of this exam is Performance Management, implying that accountants should be proactive in improving performance rather than passively measuring costs. For example, it’s clear that a substantial part of the cost of producing Deluxe units is set-up costs (almost 25% of the Deluxe units’ total costs). However, much modern manufacturing relies on highly automated, expensive manufacturing plants – so much so that some companies do not separately bookkeeping for startups identify the cost of labour because there is so little used. Instead, factory labour is simply regarded as a fixed overhead and added in to the fixed costs of running the factory, its machinery, and the sophisticated information technology system which coordinates production. In real world business enterprise the ways of implementing cost allocation and ABC approaches are different and they depend on the need and requirement of the enterprise.

By considering the above mentioned benefits of ABC system the cost involved in its implementation becomes regardless as the system enables to make calculations accurately which is very important for determining the profits. The cost involved in the implementation of ABC system is so high that it is beyond the reach of small enterprise but the benefits are so important that big enterprise cannot manage without it (Özbayrak, Akgün and Türker, 2004). 8.4 Activity Based costing is the most appropriate costing approach to use for efficient results and to reduce costs in hospitals. If adopted by all hospitals, the variables acknowledged in the views of Gordon Brown will be diminished. What defines an activity is largely up to you and your company’s specific requirements. Intrafocus helps organisations of all sizes and industry to develop successful business strategies.

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These individual activities are grouped together with similar processes into a cost pool that relates to single activity cost driver. Instead of using broad arbitrary percentages to allocate costs, ABC seeks to identify cause and effect relationships to objectively assign costs. Once the costs of the activities have been identified, the cost of each activity is attributed to each product to the extent that the product uses the activity. In this way, ABC often identifies areas of high overhead costs per unit and so directs attention to finding ways to reduce the costs or to charge more for costly products. In addition to estimating more accurately the true cost of production, ABC will also give a better indication of where cost savings can be made.

• In real world business enterprise the ways of implementing cost allocation and ABC approaches are different and they depend on the need and requirement of the enterprise.
• ABC forces businesses to assign a cost to every single production activity per product, to enable better pricing.
• Our client has begun this process with the ABM project and will continue along this route with the remaining strategy programs.
• This includes materials, labor, and any other expenses that are necessary to produce the item.
• Direct costs are normally easy to attribute; however, indirect costs or overheads can be more difficult.