ACCT601 – ACCOUNTING CAPSTONE
TERM PAPER
Term Paper
Activity Based Costing
Yaima Hi Jimenez
12/12/21
Accurate information is one of the most important assets a company can obtain, and it helps
management make better decisions. Knowing exact production costs helps the company decide
which price to assign and what processes must be improved. ABC helps to understand and
allocate overhead costs more efficiently. The traditional absorption costing method assigns
overhead costs to individual units, while the ABC method uses different cost drivers to
allocate overhead costs more efficiently. U.S GAAP should recognize ABC as an acceptable
cost reporting technique.
ACCT601 – ACCOUNTING CAPSTONE
TERM PAPER
Table of Contents
I.
Executive Summary .............................................................................................................................. 1
II.
Introduction .......................................................................................................................................... 2
Problem Statement ................................................................................................................................... 2
Background ............................................................................................................................................... 2
Objectives ................................................................................................................................................. 3
III.
Review of Literature ............................................................................................................................. 4
IV. Analysis ................................................................................................................................................. 8
V.
Recommendations .............................................................................................................................. 13
VI. Summary and Conclusions .................................................................................................................. 14
References .................................................................................................................................................. 16
ACCT601 – ACCOUNTING CAPSTONE
Executive Summary
TERM PAPER
Traditional full costing has been the sole acknowledged method for establishing and reporting
production costs for far too long. Full costing techniques have worked effectively for many years
because they are appropriate for reporting production costs in specific conditions, particularly
where direct labor and direct materials account for nearly all production costs. But things have
changed, and the share of direct labor and direct materials in overall costs has reduced from
roughly 85 percent to 40 percent as manufacturing has evolved. For many years, reporting fixed
overhead expenses was virtually a footnote because they made up a small portion of overall
production costs (less than 10 percent). However, with greater automation and the use of
machinery, the equation has shifted, and fixed overhead expenses now account for more than
half of overall production costs. What formerly insignificant and irrelevant expenditures have
become the most substantial and relevant costs. Companies should be able to choose which
costing approach they want to use. Most major organizations currently utilize activity-based
costing. The US GAAP should recognize activity-based costing as an acceptable cost reporting
technique for overhead expenses since it assigns fixed rates.
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ACCT601 – ACCOUNTING CAPSTONE
Introduction
TERM PAPER
Managerial accounting is one of the three main divisions in the accounting field, and it
involves providing more accurate information about costs for internal use. It deals with preparing
an accounting analysis of a company’s overhead activities to allocate them more precisely to the
goods and services produced. Accurate information is one of the most important assets a
company can obtain, and it helps management make better decisions. Knowing exact production
costs helps the company decide which price to assign and what processes must be improved.
ABC helps to understand and allocate overhead costs more efficiently. The traditional absorption
costing method assigns overhead costs to individual units, while the ABC method uses different
cost drivers to allocate overhead costs more efficiently. A huge obstacle in the implementation of
ABC is that US GAAP does not recognize it, and this paper will provide arguments in favor of
reversing this decision. ABC costing should not negatively affect the income statement since it
just allocates existing costs more efficiently. Financial accounting in the United States is
different from the rest of the world since US GAAP is used while most of the world uses IFRS or
accounting principles based on IFRS.
Problem Statement
To what extent could manufacturing companies benefit if Activity-Based Costing was
accepted by the US Generally Accepted Accounting Principles and financial statements using
ABC could be presented to the Securities and Exchange Commission?
Background
Managerial accounting is recognized as one of the three main divisions in the accounting
field, and companies use it to provide accurate and relevant information that helps management
make operational and investment decisions. Currently, the Financial Accounting Standards
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Board (FASB) is the organization in charge of setting the accounting standards, and the SEC is
in charge of enforcing their application by public firms. Traditional financial reporting methods
based on absorption costing: job order and process costing methods are not very efficient and can
be inexact. This aspect is one of the reasons why managerial accounting exists: even though it
represents duplicating the resources and efforts assigned to accounting, it provides information
that upper management uses to make business decisions. The fact that companies have to
duplicate expenses is a waste of resources. They prepare, and present financial statements that
follow US GAAP, and then they prepare managerial accounting reports that they can use.
Duplicating expenses does not sound reasonable simply because a company is required to
present a formal statement that does not represent the company’s real situation.
Objectives
US GAAP does not follow international accounting standards and many corporations
have to elaborate different financial reports following both US GAAP and International Financial
Reporting Standards (IFRS). Institutions like the American Institute of Certified Public
Accountants (AICPA) and the SEC are trying to change this and converge both US GAAP and
IFRS rules to eliminate the duplication of financial reports (AICPA, 2021, and FASB, 2021).
They realized it is not reasonable to prepare different financial reports, mix concepts, and
increase expenses unnecessarily.
The same logic applies to managerial accounting and ABC. If duplicating expenses is not
reasonably related to US GAAP and IFRS, shouldn’t it be reasonable that ABC could be used to
prepare financial reports and not just as an information tool? Why do companies prepare certain
financial reports that are exact for decision-making purposes but are not allowed to present them
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as official financial statements? This research paper aims to present arguments in support of the
acceptance of ABC by US GAAP.
Review of Literature
The value of an accounting system is represented by how useful and accurate the
information is provided. Traditional absorption costing methods have serious limitations
regarding the accuracy of the information provided. When information is not accurate, then it
cannot depict reality correctly. According to Maria Moisello (2019), absorption costing is
accepted by US GAAP since it allocates all the overhead costs directly over the production stage.
But what if not all overhead costs are related to the production stage? For example, depreciation
is an overhead cost applied directly to the products manufactured during the accounting period,
but most countries (including the US) accept accelerated depreciation methods. If the company
has already taken advantage of the depreciation tax shield, the cost of the machinery becomes a
sunk cost (Maria Moisello, 2019). There is no reason why financial reports should be different
from the reports presented to the country’s tax-collecting agency (the IRS in the US), but,
normally, deferred tax liabilities or assets are included in the financial statements. Management
is forced to create accounts that do not depict reality and are not useful for decision-making.
No matter what, the accelerated depreciation expense taken for one year cannot be
undone and then decide to present depreciation on a straight basis to the IRS. The matching
principle, fundamental in US GAAP, doesn’t match the actual expenses and taxes. ABC and
variable costing methods depict this situation much more accurately, but IFRS and US GAAP
decide not to accept them. Kopel et al. (2019) propose a new model to evaluate supplier
decisions and how they can affect profitability. Input prices are extremely important for a
company, and they are not given since they represent someone else’s sales, and vendors will
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always try to maximize their utility, diminishing the utility of the company. The article proposes
a new model for evaluating suppliers.
Balios (2021) explains that Big data is changing the way companies work, and
managerial accounting will also be affected. Big data involves the analysis and processing large
amounts of data to obtain significant and useful information that a company can use to improve
its efficiency and performance. The understanding and scope of big data are changing and
expanding to cover most of the activities carried out by organizations. According to Kitsantas et
al. (2020), ERP systems usually comply with financial accounting standards, but they can also be
set to carry out activity-based costing systems in a very efficient manner. The article compares
the application of both ABC and traditional costing systems using ERP and how it can improve a
company’s decision-making process, especially regarding operation costs which increases
competitiveness. Modern IT systems can be tailored to meet specific requirements, including
managerial accounting. One of the major obstacles for integrating ABC within an ERP system is
that it requires some duplication of reports and resources. If carried out properly, the benefits can
offset the additional costs.
An article by Kitsantas et al. (2020) reveals that new technologies are changing the
world, including how people work. Information is an extremely valuable asset, although many
companies have tons of information that are unless since they do not know how to process data
to be meaningful. Big data and ERP systems are important management tools to make
information useful. Both systems are useful for ABC or variable cost accounting but not for
traditional absorption costing. The reason is simple; absorption costing does not use available
information and considers many historic costs that may be obsolete. The real purpose of
information systems is to provide information that can be useful, accurate, and relevant. The
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problem with using historic values and allocating them over long periods is that they become
meaningless for decision-making purposes.
This aspect results in a contradiction since financial reporting aims to provide external
users with accurate accounting information about the organization. The fact that traditional
absorption costing is obsolete makes its mandatory application illogical. Besides the study
presented by the authors, you can also support their findings with actual information applicable
to the United States, where the IRS and Congress allow certain reporting methodologies that US
GAAP rejects (Kitsantas et al., 2020). I understand that accounting principles must present
financial reports that can be compared between companies but using an obsolete and inaccurate
methodology does not help external users make better decisions. The whole purpose of financial
reporting is not being accomplished.
Balios (2021) provides supporting information to the previous article in the sense that big
data provides useful information tools to managers for decision-making purposes, but this
information is not allowed by US GAAP for financial reporting. I believe that the importance of
accounting systems is that they truly show what is going on in an organization, and big data help
this purpose. The problem is that firms cannot present this information and knowledge to
external investors. US GAAP principles have been around for 73 years (74 now), and the world
has changed significantly during this period. Before, the cost of materials and direct labor were
among the most significant and relevant costs of a company. Nowadays, fixed overhead costs
resulting from automated machinery and information systems represent the bulk of most
organizations (Schiff & Buzinkai, 2021). Full costing methods (absorption costing) accurately
represent the organization’s costs, especially direct labor and direct materials. But as these two
cost items have lost their importance, should not accounting standards be updated to reflect that
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change? US GAAP first considered full costing in 1947 to depict the real costs of inventory as it
was published in the Accounting Research Bulleting No. 29, in the article “Inventory Pricing.”
Back then, the American Institute of Certified Accountants (AICPA) was called the American
Institute of Accountants (AIA), and they were responsible for the publication of the bulletin.
The weight and relevance of fixed overhead have changed dramatically over the past years, as
depicted in the following graph presented by the authors.
Continuing to prepare financial reports that do not consider this dramatic shift only
results in inaccurate information. Overhead costs are not a small fraction anymore, and they have
to be treated in a much more accurate manner. Currently, absorption costing or full costing treats
overhead costs as marginal that should be allocated using a fixed standard rate (Schiff &
Buzinkai, 2021). But current production systems have changed, and a single facility can produce
many different product lines, and assigning a standard overhead rate will inaccurately overstate
or understate costs.
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This debate is not new since managers, investors, and regulatory agencies acknowledge
that the current system is obsolete. Since 1973, AICPA has been proposing changes to absorption
costing since it already didn't reflect real production costs (Accounting Research Study No. 13).
Almost 50 years later, the situation has worsened, and absorption costing is less accurate now.
Absorption costing currently doesn't comply with accounting principles since absorption costing
is not fully complying with the matching principle. Organization and rules must evolve, and
accounting principles are not an exception. Continuing to insist on a system that everyone
acknowledges is not working correctly anymore is not reasonable.
Analysis
Management accounting is recognized as one of the three main divisions in the
accounting field, and companies use it to provide accurate and relevant information that helps
management make operational and investment decisions. Currently, the Financial Accounting
Standards Board (FASB) is the organization in charge of setting the accounting standards, and
the SEC is in charge of enforcing their application by public firms. The value of an accounting
system is represented by how useful and accurate the information is provided (Maria & Mella,
2019). New technologies are changing the world, and that includes how people work.
Information is an extremely valuable asset, although many companies have tons of information
that are unless since they do not know how to process data to be meaningful. This article
provides supporting information to the previous article in a sense that big data provides useful
information tools to managers for decision-making purposes, but this information is not allowed
by US GAAP for financial reporting.US GAAP principles have been around for 73 years (74
now), and the world has changed significantly during this period.
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ACCT601 – ACCOUNTING CAPSTONE
TERM PAPER
Traditional full costing accounting methods are the only costing method approved by the
Financial Accounting Standards Board (FASB) and the US generally accepted accounting
principles (GAAP). Full costing or absorption method can be divided into two main categories:
job order or process costing methods. Each one was designed 85 years ago to deal with different
production processes. Job order costing is suitable for companies that produce heterogeneous
products, while process costing is suitable for producing homogeneous products.
Making business decisions requires knowing how to calculate a fair manufacturing cost
for every product. Knowing the production costs of a unit of products impacts a company's
ability to fund new development, but it also serves as a starting point for establishing the sales
price. The distribution of overhead expenses is an important aspect of assessing a product's or
task's total cost of production. For certain firms, the old technique of overhead allocation, which
is often less complicated, works effectively (Moisello, 2020). On the other hand, overhead
allocation is a more challenging problem for many goods, and a performance-based pricing
mechanism is desirable. Another factor to consider when choosing between the two fundamental
procurement techniques is the cost of gathering and processing data.
When selecting a strategy, the corporation must consider these aspects and time and
money. In many circumstances, the ABC method takes longer and costs more money. The
difference between traditional and ABC approaches is more nuanced than the number of cost
factors suggests. When direct labor expenses make up a large portion of a product's price,
overhead costs are frequently driven by a single cost driver, such as labor or machine hours.
Traditional technology effectively spreads these expenses. When technology accounts for a large
portion of a product's cost, overhead expenses are frequently dictated by various factors. As a
result, the ABC approach's integration of various cost factors allows for more exact allocation.
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ACCT601 – ACCOUNTING CAPSTONE
TERM PAPER
In reality, performance-based calculation solutions do not comply with generally
accepted accounting regulations. However, they provide useful data for management decisionmaking. ABC systems do not map all production costs to goods, a major cause of GAAP noncompliance. Regardless of the amount of the service, expenses such as plant security, heating, air
conditioning, and building rents are incurred. Therefore, ABC systems do not link these prices to
specific items. The idea is that unless costs change based on what goes on in production, they are
not important to decision-making. This aspect makes sense from the management's point of view
but does not conform to GAAP.
Although GAAP does not approve this method, ABC systems assign certain unique nonmanufacturing costs to items (Schiff, 2021). Firms should include all product-related costs in the
product costs according to the ABC principles. For example, if a bespoke product requires
additional telephone support staff to process customer orders, companies should include these
costs in the product price. Even if this isn't a production expense, there would be no product
orders if the phone workers didn't handle those calls. In addition, if the company discontinues the
unique product, firms can lay off the phone staff. In contrast to conventional costing methods,
ABC systems assign overhead costs to goods across multiple cost pools.
Expense pools are groups of expenses collected before they are allocated to goods. These
cost blocks are linked to certain processes in the company. For example, a small business might
make many products and need to set up machines as they move from one to another. Businesses
would include overheads incurred due to the product change in the cost pool for the work
facility. The difference between this technique and standard costing systems is that traditional
methods distribute all overhead costs as part of a large bucket using a plant-wide or departmental
rate (Schiff, 2021). Traceable expenses are treated the same way by traditional and ABC
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systems. In both systems, traceable costs or expenses that can be easily and inexpensively traced
back to the goods are applied directly to the items. These expenses are often associated with
material and labor costs in small businesses.
Institutions developed full costing methods when a company's major production costs
were direct labor, direct materials, and variable overhead expenses (mostly related to supervisory
costs). On average, these costs represented 90% of the total production costs. But times have
changed, and for almost 50 years, AICPA has been proposing changes or updates to the
production costing methods (Schiff & Buzinkai, 2021). Nowadays, 80-90% of direct labor costs
have been eliminated through efficient production processes and automation. Even the
proportion of direct materials has decreased by 1/3. The only expense with a significant
proportion of total costs is fixed manufacturing overhead.
Fixed overhead now represents on average 50% of total production costs, and if you add
this percentage to traditional levels of variable overhead expenses, total overhead nowadays
totals almost 60% of total costs. This aspect leads to a significant problem with current costing
methods accepted by US GAAP since they were very good for carrying out their original
purpose: keeping track of large variable costs like direct labor and direct materials. Traditional
accounting methods like job order and process costing were designed to keep track of costs that
have lost relevance, and this trend will continue. These two methods were not designed to track
manufacturing overhead, especially fixed overhead costs efficiently, and now they represent the
bulk of production costs.
Traditional costing methods are generally inaccurate when dealing with overhead costs
since they assign predetermined rates. This approach worked very well when the differences
between actual costs assigned and costs incurred were insignificant since the proportion of
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overhead costs was very small. But now that overhead costs are most of the costs incurred by a
production process, these inaccuracies are extremely relevant, significant, and material.
Managerial accounting came up with diverse solutions to solve these inaccuracies by changing
the costing methods to understand better and apply overhead costs. Two different accounting
methods used by managerial accountants are much more efficient when dealing with overhead
costs: variable costing and activity-based costing. The problem is that these relatively new
methods are not accepted by US GAAP and cannot be used by businesses for financial reporting
purposes.
There is also a significant difference between both alternative methods since variable
costing is very efficient for assigning variable overhead costs but not for assigning fixed
overhead costs. On the other hand, activity-based costing has proven extremely efficient for
assigning proportional variable and fixed overhead costs. Since the purpose of financial reports is
to present the most accurate possible information, companies should be allowed to present their
production costs using activity-based costing.
Some accountants state that activity-based costing is too complicated and complex and
that some companies can present accurate costs using traditional full costing methods. The
purpose of proposing the acceptance of activity-based costing by US GAAP is not to replace one
accounting system with another but instead to provide alternatives so businesses can decide
which one to use. Having an alternative like companies can now choose between job order or
process costing methods would benefit companies and external users since financial reports
could be more accurate.
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ACCT601 – ACCOUNTING CAPSTONE
Recommendations
TERM PAPER
Activity-based costing should be accepted as a viable cost reporting technique by US
GAAP. Activity-based costing (ABC) further improves the costing system in different ways. It
increases the cost pool quantities accessible for obtaining overhead costs. It pools costs by
activity rather than putting all expenses in a single vast pool. The ABC cost bookkeeping
structure is predicated on activity, any occasions, gathering of errands, or assignments that have
a predetermined point, like setting up assembling machines, making items, conveying completed
merchandise, or running gear. Cost items include activities utilizing overhead costs. Any expense
driver in the manufacturing process is considered an activity under the ABC framework.
Machine settings, support needs, utilized power, purchase orders, quality checks, and
work orders are generally cost drivers. The two sorts of activity estimations are exchange drivers,
which count the occasions an activity happens, and span drivers that survey the timeframe were
taken by an activity to finish. Second, ABC creates novel strategies for distributing overhead
expenses for things, for example, assigning costs dependent on cost-producing exercises rather
than volume measurements like machine hours or direct labor costs. Unlike traditional costing
evaluation techniques that give indirect or overhead costs to products dependent on volume
considered, such as direct work hours and direct machine hours, the ABC approach distinguishes
five general classes of activity that are, somewhat, independent of the number of units produced.
They include Unit-level activity, Batch-level activity, organization-sustaining activity, customerlevel activity, and product-level activity.
Finally, ABC changes the basis of several indirect expenses, including utilities, wages,
and depreciation, making them attributable to specific activities. On the other hand, ABC shifts
overhead expenditures from low-volume to high-volume items, increasing the unit cost of the
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low-volume items. Given these benefits, this research recommends that the US GAAP accepts
ABC as a viable costing method because it provides valuable information for decision-making.
Summary and Conclusions
For too many years, traditional full costing has been the only acceptable alternative for
determining and reporting production costs. Full costing methods worked very well for many
years since they are suitable for reporting production costing under specific circumstances,
especially where direct labor and direct materials represent almost all production costs. But times
have changed, and nowadays, as production has changed, the proportion of direct labor and
direct materials in total costs has decreased from around 85% to 40%. For many years, reporting
fixed overhead costs was almost secondary since they represented only a small percentage of
total production costs (less than 10%). But nowadays, automation and increased use of
machinery have changed the equation, and fixed overhead costs on average represent over 50%
of total production costs. What was once marginal costs that had little relevance are now the
most significant and relevant?
The problem is that traditional full costing methods do not account for them properly.
This approach was not a problem 85 years ago or 60 years ago, but it is a significant problem
because manufacturing costs are not properly calculated and reported. The whole principle of
materiality is not being accomplished by traditional full costing since they were not designed to
deal with automation. In the future, this problem will only get worse as artificial intelligence, and
further automation will probably end up replacing all assembly line workers (direct labor). The
world is changing, and accounting and costing methods cannot refuse change. Whether the
FASB likes it or not, traditional full costing is obsolete and doesn't report production costs
accurately, and the lack of accuracy may be a handicap for external decision-makers. Companies
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will not stop using machines and robots simply because the FASB prefers costing methods that
focus on direct labor and direct materials. The whole purpose of financial reporting is not being
fulfilled due to the rejection of accurate and modern costing methods. The FASB should allow
companies to decide which costing method they want to use. Due to its high accuracy and
relevance, most large corporations already use activity-based costing for internal decisionmaking processes. Mangers know that job order costing or processes costing are not accurate
anymore, so companies must spend more money to produce different account records, one that
works and is used for internal purposes and one that is used for external reporting purposes. This
aspect does not make sense, and that is why the paper proposes that US GAAP accepts activitybased costing as a valid cost reporting method.
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References
AICPA. (2021). Convergence of International and US Accounting Principles and IFRS.
https://us.aicpa.org/advocacy/issues/us-intlacctprinconvergenceandifrs
Balios, D. (2021). The impact of Big Data on accounting and auditing. International Journal of
Corporate Finance and Accounting (IJCFA), 8(1), 1-14.
FASB. (2021). Comparability in International Accounting Standards: A Brief History.
https://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176156304264
Kitsantas, T., Vazakidis, A., & Stefanou, C. (2020). Integrating activity based costing (ABC)
with enterprise resource planning (ERP) for effective management: A literature review.
Moisello, A. M., & Mella, P. (2020). Matching Revenues and Costs: The Counter-Intuitive
Rationality of Direct Costing. International Journal of Business and Management, 15(1),
202-222.
Schiff, J., & Buzinkai, D. (2021, Winter). Is It Time to “Retire” Full Costing? Management
Accounting Quarterly, 22(No. 2), 1–11.
.
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Term Paper Outline
Activity Based Costing
YAIMA HI JIMENEZ
12/12/21
Page 1 of 7
I.
Executive Summary
a. Traditional full costing has been the sole acknowledged method for establishing
and reporting production costs for far too long.
b. Companies should be able to choose which costing approach they want to use.
Most major organizations currently utilize activity-based costing.
c. The US GAAP should recognize activity-based costing as an acceptable cost
reporting technique for overhead expenses since it assigns fixed rates.
II.
Introduction
a. Managerial accounting is one of the three main divisions in the accounting field,
and it involves providing more accurate information about costs for internal use.
b. Accurate information is one of the most important assets a company can obtain,
and it helps management make better decisions.
c. Financial accounting in the United States is different from the rest of the world
since US GAAP is used while most of the world uses IFRS or accounting
principles based on IFRS.
d. Problem Statement
i. To what extent could manufacturing companies benefit if Activity-Based
Costing was accepted by the US Generally Accepted Accounting
Principles and financial statements using ABC could be presented to the
Securities and Exchange Commission?
Page 2 of 7
e. Background
i. Managerial accounting is recognized as one of the three main divisions in
the accounting field, and companies use it to provide accurate and relevant
information that helps management make operational and investment
decisions.
ii. The fact that companies have to duplicate expenses is a waste of
resources. They prepare, and present financial statements that follow US
GAAP, and then they prepare managerial accounting reports that they can
use.
f. Objectives
i. If duplicating expenses is not reasonably related to US GAAP and IFRS, it
should be reasonable that ABC could be used to prepare financial reports
and not just as an information tool.
ii. Why do companies prepare certain financial reports that are exact for
decision-making purposes but are not allowed to present them as official
financial statements?
iii. This research paper aims to present arguments in support of the
acceptance of ABC by US GAAP.
III.
Review of Literature
a. The value of an accounting system is represented by how useful and accurate the
information is provided. There is no reason why financial reports should be
different from the reports presented to the country’s tax-collecting agency (the
Page 3 of 7
IRS in the US), but, normally, deferred tax liabilities or assets are included in the
financial statements.
b. Kopel et al. (2019) propose a new model to evaluate supplier decisions and how
they can affect profitability. Input prices are extremely important for a company,
and they are not given since they represent someone else’s sales, and vendors will
always try to maximize their utility, diminishing the utility of the company. The
article proposes a new model for evaluating suppliers.
c. Balios (2021) explains that Big data is changing the way companies work, and
managerial accounting will also be affected. Big data involves the analysis and
processing large amounts of data to obtain significant and useful information that
a company can use to improve its efficiency and performance.
d. According to Kitsantas et al. (2020), ERP systems usually comply with financial
accounting standards, but they can also be set to carry out activity-based costing
systems in a very efficient manner.
e. An article by Kitsantas et al. (2020) reveals that new technologies are changing
the world, including how people work. Information is an extremely valuable asset,
although many companies have tons of information that are unless since they do
not know how to process data to be meaningful
f. Besides the study presented by the authors, you can also support their findings
with actual information applicable to the United States, where the IRS and
Congress allow certain reporting methodologies that US GAAP rejects (Kitsantas
et al., 2020).
Page 4 of 7
g. Balios (2021) provides supporting information to the previous article in the sense
that big data provides useful information tools to managers for decision-making
purposes, but this information is not allowed by US GAAP for financial reporting.
h. Nowadays, fixed overhead costs resulting from automated machinery and
information systems represent the bulk of most organizations (Schiff & Buzinkai,
2021).
i. Since 1973, AICPA has been proposing changes to absorption costing since it
already didn't reflect real production costs (Accounting Research Study No. 13).
j. Absorption costing currently doesn't comply with accounting principles since
absorption costing is not fully complying with the matching principle.
IV.
Analysis
a. Management accounting is recognized as one of the three main divisions in the
accounting field, and companies use it to provide accurate and relevant
information that helps management make operational and investment decisions.
b. The value of an accounting system is represented by how useful and accurate the
information is provided (Maria & Mella, 2019).
c. New technologies are changing the world, and that includes how people work.
Information is an extremely valuable asset, although many companies have tons
of information that are unless since they do not know how to process data to be
meaningful.
d. This article provides supporting information to the previous article in a sense that
big data provides useful information tools to managers for decision-making
purposes, but this information is not allowed by US GAAP for financial
Page 5 of 7
reporting.US GAAP principles have been around for 73 years (74 now), and the
world has changed significantly during this period.
V.
Recommendations
a. Activity-based costing should be accepted as a viable cost reporting technique by
US GAAP. Activity-based costing (ABC) further improves the costing system in
different ways.
b. It increases the cost pool quantities accessible for obtaining overhead costs.
VI.
Summary and Conclusions
a. For too many years, traditional full costing has been the only acceptable
alternative for determining and reporting production costs.
b. The whole purpose of financial reporting is not being fulfilled due to the rejection
of accurate and modern costing methods. T
c. he FASB should allow companies to decide which costing method they want to
use. Due to its high accuracy and relevance, most large corporations already use
activity-based costing for internal decision-making processes.
VII.
References
Page 6 of 7
References
AICPA. (2021). Convergence of International and US Accounting Principles and IFRS.
https://us.aicpa.org/advocacy/issues/us-intlacctprinconvergenceandifrs
Balios, D. (2021). The impact of Big Data on accounting and auditing. International Journal of
Corporate Finance and Accounting (IJCFA), 8(1), 1-14.
FASB. (2021). Comparability in International Accounting Standards: A Brief History.
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