Activity based costing

Topics: Activity-based costing, Cost driver, Costs Pages: 7 (1566 words) Published: June 2, 2014

Part 3
Case Analysis Report – DBS Consulting Services

Executive Summary
This report provides an analysis of Activity Based Costing systems and Conventional Costing systems to determine whether the application of Activity Based Costing concepts would be useful at DBS Consulting Services.

A profitability analysis of the two consulting services offered by DBS Consulting Services (e-Commerce Consulting and Information Systems Consulting) was performed using Activity Based Costing and Conventional Costing. Using the conventional costing approach, the overheads of $342,000 were allocated at $129,960 (e-Commerce Consulting) and $212,040 (Information Systems Consulting). Using the Activity Based Costing approach, the overheads of $342,000 were allocated at $107,160 (e-Commerce Consulting) and $234,840 (Information Systems Consulting).

Before implementing an Activity Based Costing system, management needs to assess the problems that the firm is facing so that the Activity Based Costing system can be designed to address those problems. DBS Consulting Services is in a tight local labour market and is having difficulty finding quality staff.

It was found that E-Commerce Consulting Services provided a higher income per billings percentage than that of Information Systems Consulting Services (19% vs. 3%) under the Activity Based Costing approach. E-Commerce Consulting Services provided the higher return per sales dollar. These results would suggest that the professionals at DBS Consulting Services need to spend more time in e-Commerce.

The success of failure of Activity Based Costing approach is determined by the reactions of the people who develop and use the system.

An Activity Based Costing system can be costly and time consuming to implement and maintain, it requires extensive training, expertise and information. However, the benefits of Activity Based Costing systems, being improved cost accuracy and assisting management with decision making, outweigh these costs.

Introduction
It is said that Activity Based Costing can result in improved costing accuracy when compared with Conventional Costing procedures.

Arguments to support this claim are that companies who adopt Activity Based Costing are not limited to a single cost driver when having to allocate costs to their products and activities. Activity Based Costing allows companies to use non-unit cost drivers as well as unit cost drivers to allocate costs. Also, because use differs significantly amongst activities, no single cost driver can accurately assign costs for all activities whereas Activity Based Costing takes advantage of multiple cost drivers, not just a single cost driver.

Arguments against this claim are that service industries often have higher levels of facility costs which mean fewer costs will be included in the Activity Based Costing system. Service industries also have a lot of non-repetitive activities which make it difficult to identify an individual activity to assign a cost driver to.

Both the conventional costing system and the Activity Based Costing system calculate the cost of a product or service in relation to the revenue it generates. However, the conventional costing system assigns manufacturing overheads based on a volume-based cost driver, and Activity Based Costing systems assign the manufacturing and non-manufacturing overheads based on the activities required to produce the item.

Part 3
Case Analysis Report – DBS Consulting Services (cont.)

The Conventional Costing System
Conventional costing approaches assume that manufacturing overhead costs are related to the volume of production which is usually measured by input measures such as direct labour hours or direct machine hours.

The features of a conventional costing system are:
Direct material and direct labour costs are traced to products Manufacturing overheads are assigned to products based on a pre-determined overhead rate...

References: Langfield-Smith, K., Thorne, H., & Hilton, R. (2012). Management accounting: Information for creating and managing value (6th edition). North Ryde, NSW, Australia: McGraw-Hill.
Heisinger, K., & Hoyle, J. (2013.). Managerial Accounting,v.1.0. Retrieved April 10, 2014 from http:/catalog.flatworldknowledge.com
Johnson, R. (n.d.). Traditional Costing Vs. Activity-Based Costing. Retrieved April 1, 2014 from http:/smallbuiness.chron.com
Wilkinson, J. (July 23, 2013). Activity-based Costing (ABC) vs Traditional Costing. Retrieved April 1, 2014 from http:/strategiccfo.com
Marx, C. (n.d.). Activity Based Costing (ABC) And Traditional Costing Systems. Retrieved April 4, 2014 from http:/financialsupport.weebly.com
Keshav. (n.d). Advantages And Disadvantages of Activity-Based Costing (ABC). Retrieved April 1, 2014 from http:/accountlearning.blogspot.co.nz
Delaware Technical Community College. (n.d.). Retrieved April 1, 2014 from https://www.dtcc.edu
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