Strategic Management Accounting and Performance Measurment

Report on Introduction of Activity Based Costing in a Service Organisation

1 . Introduction

The primary concepts of managerial accounting have remained practically unchanged for nearly a century even though business activities have become far more complex and varied in products , services , dimension and scope . The advent of strong competition in all sectors of business accentuated sharply since the emergence of globalisation has led to a paradigm shift in costs and has resulted in migration of substantial manufacturing activity to China and service activity to various global pockets in Asia and

Africa , notably India and South Africa

This stage challenges management accountants today . There is pressure to modify the methods , techniques , and procedures used for several decades Many business practitioners and some of their former professors have already joined forces to modify and adapt the managerial accounting practices to the needs of production system changes in response to worldwide competition

The ABC system of costing , a short form for Activity Based Costing is a relatively new method of costing products and services and is a major outcome of the efforts by modern day management accountants to respond to the challenges of accounting for modern day businesses . It originated in the 1980s and , using premises that are significantly different from those used by traditional costing methods , gives sharply differing costing results . Most start-ups even today and quite a few mature and established companies use orthodox methods of costing . As companies move along , growing in products , activities and size most financial controllers find orthodox costing systems to be inadequate and keep on tweaking their costing systems to make them more representative of the costs of the products and services of their companies . Costing systems , apart from helping in monitoring costs serve a number of functions , important ones among them being performance assessment and the fixation of new products and services . Quite often , companies find that costs of new products or services , after costing , are discordant with market prices for similar products , a development that causes concern , worry and even wrong judgments , in price fixation , product introduction and product positioning

More often than not , this occurs because of the system of overhead or indirect cost allocation followed by traditional costing methodology wherein all indirect costs , i .e , costs that are not directly allocable to products or services are absorbed based on volumes of manufacture Use of this system of costing results in inappropriate allocation when costing a number of different products manufactured at the same plant or with common overheads and leads to under or over absorption of costs with consequently inaccurate final costing results

It is the objective of this report to detail the various factors that need to be taken into account in the introduction of an Activity Based Costing (ABC ) system for a marketing organisation . The various texts and literature consulted and cited for the purpose of this report are available in the bibliography

2 . Important Differentiating Factors in ABC Systems

There are three major differences between traditional cost accounting systems...