While most business managers are aware of the power of ABC and the benefits of drastically improving their businesses by making relevant and fact based decisions, only a small percentage of them actually use ABC. The 3 frequently mentioned issues when it comes to implementation of ABC are:
Implementation of Activity Based Costing Meaning of Activity Based Costing ABC Activity Based Costing is an accounting methodology used for assigning accurately the extent of resources consumed and overhead costs incurred to produce a product or service on the basis of value adding activities.
Definition by CAM-1 Organization of Arlinton Texas, The collection of financial and operation performance information tracing the significant activities of the firm to product costs.
They classify the costs into two types. They are Short term variable costs and Long term variable costs. The reason is that all the costs are variable in the long run. But, only variable costs are variable in the short term. For example production scheduling costs can be changed in the long term by changing number of runs rather than changing number of units produced.
Under ABC system, some activities are responsible for the determination of cost of a product. They are named cost drivers. A cost driver is an activity which generates cost. The total cost is divided into two types i.
The proper distinction is made between the cost behavior patterns.
The cost behavior patterns are volume related, diversity related, events related and time related. The appropriate cost driver has to be identified for tracing the overhead to a product.
The cost drivers dictate the cost behavior pattern. Allocation of Overheads under Activity Based Costing Under Activity Based Costing, the costs are classified as short term variable costs and long term variable costs. The short term variable costs are allocated to the products on the basis of volume related cost drivers.
Direct labour hour, Direct material cost and machine hours are some of the examples of volume related cost drivers. According to Kalpan and Cooper, volume related cost drivers can not be used for allocating long term variable costs to products.
The reason is that the long term variable costs are driven by the complexity and variety of business activities rather than by volume. Hence, the causes for the overhead costs should be understood in line with the types of activities connected with the production department and service departments.
The following figure discloses the way of allocation of overhead under ABC.Costing of Service Sector LEARNING OBJECTIVES: This gives an impetus for the application of Activity Based Costing in service sector, with a desire to secure better understanding of costs, as an aid to decision making and Retail banking, Postal delivery, Credit card etc.
uses process costing method. 3. Two-Stage Activity-Based Costing, Banking, Benchmarking (This exercise is a continuation of Exercise and should be assigned only if Exercise is also assigned.) A part of the activity analysis conducted at the Maple Lake branch of Buffalo State Savings Bank (BSSB) was identifying potential cost drivers for each major activity.
1 | Activity based costing in China: a case study of Xu Ji Electric Co. Ltd Executive summary This project investigated the implementation of activity-based costing (ABC) at .
- The Practicability of Activity-Based Costing (ABC) in the Nigerian Retail Banks Business Intelligence Journal July ABC can be a powerful tool for industrial decision Conceptual Framework and Literature makers (Lere, ). Activity based costing system help managers manage overhead and understand profitability of products and customers and therefore is a powerful tool for decision making.
However activity based costing has a number of limitations or disadvantages. Activity-based management and activity-based costing (ABM/ABC) have brought about radical change in cost management systems.
ABM has grown largely out of the work of the Texas-based Consortium for Advanced Manufacturing-International (CAM-I).