Activity Based Costing in Management Accounting

Activity Based Costing in Management Accounting

A Research

NAME

PROFESSOR

Management Accounting

SCHOOL

The use of an activity-based infrastructure has been proposed as being advantageous in circumstances where there is considerable diversity of overhead resource input to products and services . However it can also be argued that ABC systems are simply just more refined ways to allocate largely committed costs , formerly known as `fixed costs , to products

Introduction

Managers and other stakeholders of an organisation , whether for profit or not for profit , needs financial data and

information for decision making purposes . Some of these stakeholders make do with the information provided in the business organisations ' published financial statements and other periodic filings with the Securities and Exchange Commission The information needs of managers and people within the organisation are a different matter . These people need highly specialised and customised financial information . These information should be accurate , relevant and on-time in for the users to make informed decisions

Unfortunately for accountants , the financial information provided by the application of generally accepted accounting standards and practices in the treatment of financial transactions are not sufficient to meet the decision making requirements of managers . Anthony , Hawkins and Merchant opined that traditional product cost system was designed many years ago when production operations were labor intensive and overhead costs were a relatively small proportion of pathetically sad that many financial managers and accountants know that the cost accounting information provided by their accounting systems is `a bunch of lies (Buys Green 36 , and still do nothing about this

The way organisations do business today is starkly different than how organisations did business several decades ago . We have seen during the past decades production processes ' gradual shifting from labor-intensive to capital-intensive operations (Anthony , Hawkins Merchant 595 ) which has resulted today to overhead costs amounting to half or more of 595

These overhead costs formed part of the directly accounting these costs into the product is much too costly and time consuming . However these costs need to be factored in , in one way or another , into the product 's cost to enable the business organisation to price the product competitively , and to assess the profitability of product lines . As such an allocation method was created which assigns overhead costs into individual products , product lines , or product batches according to a certain criteria or driver : direct labour hours direct material costs , an arbitrary criterion , or a criterion that management sees fit . This allocation method is collectively known as Activity Based Costing or ABC

Activity Based Costing : Defined

Activity Based Costing or ABC , a subset of Activity Based Management is a management reporting system that focused on the costs of the work activities associated with operating the business in lieu of the standard cost centers (cms .hhs .gov . On the other hand , Activity Base Management refers to any actions that might be taken based on the ABC information (Anthony , Hawkins Merchant 600 . Some of these actions might include pricing strategies , supplier selection , customer selection , product mixes...