Effect of Value-Added Activity Based Costing and Economic Value Measure and Their Impact on Process Improvement & Business Profitability
Effect of Value-Added Activity Based Costing and Economic Value Measure and their impact on Process Improvement & Business Profitability
Business’ profitability and processes can be greatly improved by implementing a value-added activity based costing (ABC) and economic value measure system. The effects can save a company exponentially with the additional detail ABC information provides. ABC information provides much more accurate information about the costs of existing products and the cost of implementing future products as well. This costing method first assigns costs to activities and then to goods and services based on how much each good or service uses the activities (Hilton pg 147). ABC is common among companies looking to improve upon their more traditional costing systems. The break down of costs in ABC information is quintessential to managers for decision-making purposes. Managers can precisely estimate the cost of individual products and services so they can identify and eliminate those that are unprofitable and lower the prices of those that are overpriced (Wikipedia). The specific detail associated with ABC information allows one to pinpoint these areas. There are 4 critical steps to determine the costs of goods and services using ABC (Hilton pg 147-158).
Step 1: Identify and classify the activities related to the company’s products.
Step 2: Estimate the cost of activities identified in Step 1
Step 3: Calculate a cost-driver rate for each activity
Step 4: Assign activity costs to products Step 1 involves identifying the activities performed to produce goods and services. There is a five-level hierarchy of resources and activities used to address this issue.
1) Unit-level resources and activities- resources acquired and activities performed specifically for individual units
2) Batch-level resources and activities- resources acquired and the activities performed to make a group, or batch, of similar products.
3) Product-level
Business’ profitability and processes can be greatly improved by implementing a value-added activity based costing (ABC) and economic value measure system. The effects can save a company exponentially with the additional detail ABC information provides. ABC information provides much more accurate information about the costs of existing products and the cost of implementing future products as well. This costing method first assigns costs to activities and then to goods and services based on how much each good or service uses the activities (Hilton pg 147). ABC is common among companies looking to improve upon their more traditional costing systems. The break down of costs in ABC information is quintessential to managers for decision-making purposes. Managers can precisely estimate the cost of individual products and services so they can identify and eliminate those that are unprofitable and lower the prices of those that are overpriced (Wikipedia). The specific detail associated with ABC information allows one to pinpoint these areas. There are 4 critical steps to determine the costs of goods and services using ABC (Hilton pg 147-158).
Step 1: Identify and classify the activities related to the company’s products.
Step 2: Estimate the cost of activities identified in Step 1
Step 3: Calculate a cost-driver rate for each activity
Step 4: Assign activity costs to products Step 1 involves identifying the activities performed to produce goods and services. There is a five-level hierarchy of resources and activities used to address this issue.
1) Unit-level resources and activities- resources acquired and activities performed specifically for individual units
2) Batch-level resources and activities- resources acquired and the activities performed to make a group, or batch, of similar products.
3) Product-level
Cited: 1.http://jobfunctions.bnet.com/abstract.aspx?docid=82444 2.http://site.ebrary.com.library.esc.edu/lib/empire/docDetail.action?docID=10046824 3.http://en.wikipedia.org/wiki/Activity-based_costing 4.http://www.accountingcoach.com/online-accounting-course/35Xpg02.html 5.http://www.answers.com/topic/activity-based-costing 6. Hilton, Maher and Selto. "Cost Management: Strategies for Business Decisions." 4th edition. McGraw-Hill Irwin. 2008