National University Of Ireland, Dublin
NUID: BSc 14B Finance
Lecturer: Jane Cao
Name: Pham Thi Thanh Dung
Student Number: 10286411
Date of submission: Nov 28, 2011
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Table of content
1- Current costing system
2- ABC system
IV- Analyze the key figures calculated
V- Limitation of ABC system
In today’s advanced manufacturing and competitive environment, accurate costing information is crucial for all the kinds of businesses, such as manufacturing firm and service firms. Activity-Based Costing system (ABC) has increasingly attracted the attention of researchers alike as one of the strategic tools to aid managers for better decision making. The benefits of ABC system and its impacts on companies’ performance have motivated.
1. Current costing system
According to the article, QuantumTM current costing system is “30% over estimated cost, excluding administrative and selling cost”. This means that the selling price of the product is determined using 30% mark-up of the cost including direct material, direct labor, and manufacturing overhead. However, this strategy seems not work very effectively. Even it helps increase the cost of the simple instrument; it also reduces the cost of the complex product. As a result, the company is now facing with the problem of non price competitive of simple instruments. Therefore, if the company continues to carry out this current costing system, it definitely will affect the company’s financial performance in the long run. Thus, QuantumTM’s management- Jason Norton has suggested to use the activity-based-costing, which is also known as ABC system to allocate the product cost with the expectation that it can help overcome the problem resulting from the current costing system. 2. ABC system:
What is ABC system?
In contrast to traditional cost-accounting systems, ABC systems first accumulate overhead costs for each organizational activity, and then assign the costs of the activities to the products, services, or customers (cost objects) causing that activity.
What changes are proposed by the ABC system? “Traditional cost-accounting systems often allocate costs based on single-volume measures such as direct-labor hours, direct-labor costs, or machine hours. While using a single volume measure as an overall cost driver seldom meets the cause-and effect criterion desired in cost allocation, it provides a relatively cheap and convenient means of complying with financial...