Description
research paper on an advanced or deeper study of a topic related to Activity Based Costing (ABC). The paper must be 7–10 pages in length, not including any tables, graphs, etc. A minimum of 6 accounting journal sources must be used, all of which have been published within the last 3 years. Current APA formatting is required.
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Activity Based Costing
Activity-based costing (ABC) is an approach that is used by accountants to identify the
events in the organization and allocate costs according to how they consume resources during the
production process. The accountant assigns the activities to a cost object then identifies a cost
driver to which he or she attaches to a cost output. This approach focuses its attention on cost
drivers as the primary cause of cost increase (Lansen 335). As opposed to the conventional
method of costing that allocates cost based on volume-related drivers, ABC method uses
transaction-based drivers such as the number of set-ups executed. Thus, long-term variable
overheads which were considered to be fixed costs can be directly related to products.
The method was first developed by managers in the 1980s to cater for the inefficiency
of the conventional process of costing. The traditional system allocates cost to products based on
the volume. Consequently, products that have low volume tend to be under-costed while high
volume products receive a high cost. This, however, should not be the case as high-volume
products should receive a higher margin because of cost reduction that is related to more
significant economies of scale. This method caused dissatisfaction among managers, and thus
they created the activity-based costing as a result.
Why companies should adopt ABC costing
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The conventional method allocates all labor fixed overheads and other costs that are not
directly related to production costs. It is no longer considered good enough to put unrelated costs
such as direct labor and production overheads under one pool. Another reason why companies
need ABC costing method is to enable the managers set affordable prices that will help the firm
maximize profits.
The activity-based costing method helps managers in gathering crucial information for
strategic planning. Redesigning manufacturing processes can help to manage costs and
competitive products as a result. ABC system has necessitated collection of information that is
used to determine product costs, assessing plant performance and making the best product mix
decisions. Some key indicators of a firm's need to adopt the activity-based costing include
multiple product lines, high overhead costs, mistrust by managers of the reported costs and a
marketing department that is not impressed by the pricing decisions.
Implementing the ABC costing method
Activity-based costing method follows a four-stage procedure. In the first stage, the accountant
identifies all activities. He then categorizes these activities into cost pools. The third step is to
select appropriate cost drivers, and lastly, he assigns the cost per driver to the products. The
stages are discussed in ...