Activity Based Costing
This term paper of advanced management accounting discusses the basic concepts of activity based costing. The major focus of this work is to examine activity based costing in small hospitality businesses in UK. For this purpose, information is extracted from various articles, journals and web to gain in depth insight of the cost accounting concept. In addition to this, it discusses the benefits and drawbacks of the activity based cost method.
ABC system is based on the fact that for each there is a sufficiently precise and resides in it, the cost factor, changes in rates of which affect the cost of the function. Thus, the system applies the ABC monitors and cause-and-effect relationship between the cost drivers (database distribution) and the costs, and not conditional connections, as is customary in the traditional calculation (cimaglobal.com, n.d). Under the traditional technology of distribution of indirect costs, are made apportionments of costs of service centers to production centers in hospitality industry, but the cumulative costs in the production centers are assigned to products or processes usually based on machine hours, man hours or units produced, but these rules do not accurately reflect the resources consumed by different products or processes (Bradtke, 2007, n.d). The methodology of Activity Based Costing is based on the fact that a company to produce products or services need to perform activities which consume resources, so activities are funded first and then the cost of activities are assigned to different cost objects (products, services, customer groups and regions, processes, etc) consuming such activities, in such a way we achieve a much greater accuracy in determining the costs and the correlative profitability.
The ABC in Action
Small hospitality management systems of activity-based costing (ABC) located overhead costs to specific activities causing them, thereby providing a safer product cost. Four key concepts differentiate cost-accounting systems based on activities of the traditional cost accounting, which allows systems to activity-based cost data provide more accurate product (Brimson, 1995, n.d)
In a system based on activities, the product cost is the sum of all costs required to manufacture and deliver the product. The company development activities consume resources and the availability and use of resources create costs. Accounting activities of an organization breaks into a structure of activities that provides a reasoned analysis of cause and effect of how the key objectives and associated activities create costs and result in products (Stefan, 2010, n.d).
A cost driver is an event that affects the cost/performance of a group of related activities. The family cost drivers include the number of machine configurations, number of engineering change notices and purchase order number. The cost drivers reflect the demands placed on activities in the activity levels and production. By controlling the driver cost can eliminate unnecessary costs, which results in an improvement in product cost.
Direct identification involves assign costs to products or processes that consume resources. Many overhead can be concealed effectively identify the products, thus providing a more accurate product cost.
No value added costs
In production processes, customers may perceive that certain activities do not add value to the product. By identifying cost drivers, a company can pinpoint these unnecessary costs. Systems costs based on activities identified and put a cost on the activities implemented (that add value and not to add) so that management can determine the expected changes in resource requirements for each activity. In contrast, traditional cost systems accumulate costs by budget line items and functions (Reimers, 2007, n.d)). It shall be...
References: Activity Based Costing, Data retrieved from http://www.cimaglobal.com/Documents/ImportedDocuments/cid_tg_activity_based_costing_nov08.pdf.pdf
Bradtke, D. (2007) Activity-Based Costing, GRIN Verlag
Brimson, J. (1995) Accounting for Activities, Editorial Marcombo
Dejnega, O. (2011) Method Time Driven Activity Based Costing, Data retrieved from http://www.jaes.reprograph.ro/articles/spring2011/DejnegaO.pdf
Reimers, (2007) Financial Accounting, Pearson Education India
Stefan, P. (2010) An analysis of Activity Based Costing (ABC) journal literature, International Journal of Business Strategy Data retrieved from http://www.freepatentsonline.com/article/International-Journal-Business-Strategy/237533592.html
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