Traditional management systems rely on volume to allocate overhead. Indirect cost is allocated to items such as direct labor hours, units produced or the production of machine hours. Using only single cost drivers, potentially distorts cost estimates especially when dealing with high volume production. The implementation of Activity Based Costing serves as a solution to this downside in traditional systems. ABC utilizes various cost drivers both volume and non-volume related to estimate costs, providing more accurate estimations. Although this method benefits managers in providing the information needed for decision making and improving efficiency of business processes, it still is only limited to the internal aspect of the organization. Lack of technology within these systems caused limited coordination with the supply chain. According to Jiambalvo (2007) managerial accounting has to do with providing information to plan and control operations to make business decisions. He further states that understanding managerial accounting is a part of understanding the impact of information technology on competition, business processes, and the interactions companies have with suppliers and customers. With the utilization of technological advances, other management systems such as Supply Chain Management(SCM) and Customer Relationship Management (CRM) are implemented to integrate all organizations involved the supply chain that results in firms gaining a competitive advantage, adding value and improving efficiency to business processes, increasing profitability while reducing overall costs, and achieving customer satisfaction. With the limitations that traditional management systems present and the potential benefits of SCM and CRM systems, it would be beneficial for organizations to make the transition that would place them in more favorable operating positions in the global market. Gaining a competitive advantage through improved businesses processes, efficiency, profitability, and customer satisfaction is fundamental to the growth and sustainability of any organization. Traditional Management Systems
It is essential for organizations to be able to derive cost estimates to improve their decision making processes. Traditional management systems often rely on volume to allocate overhead costs. This method of costing involves the allocation of manufacturing overhead costs to the products that are manufactured. The factory’s indirect costs is allocated to the items manufactured based on the volume such as direct labor hours, units produced or the production of machine hours. According to Wang, Du, Lei, and Lin (2010) traditional cost accounting mainly uses one single cost driver such as direct labor or output volume to allocate overhead costs. This method does not accurately estimate cost when handling larger volumes of production. As a result Activity Based Costing was introduced. This method utilizes cost drives that are related to volume production in addition to other cost drivers that are not volume related thus giving more accurate cost estimations. According to Jiambalvo (2007) companies allocate cost to various cost objects in order to provide information required to make appropriate decisions, to reduce the waste of common resources, to persuade managers to evaluate efficiency of internal processes, and to calculate the cost of products for financial reporting in addition to determining cost-based prices. However this does not eliminate other issues that traditional management systems produce. There is still a lack of integration between companies in the supply chain and the availability of customer information. With a traditional system organizations perform transactions with each other on a short-term basis and each party usually focuses on the maximization of their own profits. Organizations within the traditional realm view themselves as independent and not a part of an integrated channel. Because...
Please join StudyMode to read the full document