ACCMOD5

Activity Based Costing

Running Head : ACTIVITY BASED COSTING

2006

Activity Based Costing

I . Introduction

There are four universal truisms , which are applicable to every kind of businesses . First , a business must be able to provide products and services at a lower overall cost than the competition . Second inflation-adjusted cost of production and logistics must continuously decrease . Third is knowing the truth about cost and profit of each product . Finally , understanding and managing cash flow is as important as profit

Each of these areas involves decision-making practices that have

a profound impact on the organization . Cost cutting , for instances becomes an area of decision-making that can cause a decay if the correct decisions are not made . This condition may exist if the company employs data from traditional financial accounting instead of control-oriented data (FAA , 2004

II . About Activity Based Costing (ABC

II .1 Understanding Activity Based Costing (ABC

Activity-based costing is a concept explaining that a company 's outputs (products and services ) give rise to the need for operating , management and administrative activities that , in turn , make it necessary that costs has incurred in providing those activities (Kaplan , 2005

At one side , these operating , management , and administrative costs can assign to the outputs that caused them to be incurred by routing them first to the activities that made them necessary and then to the outputs that made the activities necessary . At the other side , the volume and mix of outputs can used to project the demand for the various operating management , and administrative activities and then this demand can used to project the costs of providing those activities

II .2 Importance of Activity Based Costing

A major advantage of using Activity Based Costing (ABC ) is it avoids or minimizes distortions in product costing as results of arbitrary allocations of indirect costs . Unlike traditional costing which cannot be tied to specific outputs , ABC generates useful information on how money is spent , if a department is cost-effective , and how to HYPERLINK "http /www .dod .mil /comptroller /icenter /learn /bestprac .htm " \o "benchmark " benchmark (compare oneself against others ) for quality improvement III . Steinway Piano and Activity Based Costing

III .1 Activity Based Costing in Steinway Piano

Looking at the corporate pro of Steinway Piano , we find Steinway Pianos can be considered as a good candidate to employ ABC method . This is because this organization , Steinway Piano , needs to manage all costs in to define costs appropriately while providing accurate cost-based pricing for their products

There are many reasons for Steinway Pianos in using ABC method . One of them is this organization only produce a few goods in its one year , but with the quality , which can be spelled out very satisfied Therefore , to maintain this excellence , the company needs the correct calculation in costs (Kevin Kennedy Associates , Inc , 2005

For instances , in to make a handmade legendary collection of pianos using the rarest and finest wood , Steinway Pianos have to reckon extra costs and time to get the materials . This matter because...