The Emergence of Abc Systems
Activity Based Costing (ABC)
The emergence of ABC systems
During the 1980s the limitations of traditional product costing systems began to be widely publicised. These systems were designed decades ago when most companies manufactured a narrow range of products, and direct labour and materials were the dominant factory costs. Overhead costs were relatively small, and the distortions arising from inappropriate overhead allocations were not significant. Information processing costs were high, and it was therefore difficult to justify more sophisticated overhead allocation methods.
Today companies produce a wide range of products; direct labour represents only a small fraction of total costs, and overhead costs are of considerable importance. Simplistic overhead allocations using a declining direct labour base cannot be justified, particularly when information processing costs are no longer a barrier to introducing more sophisticated cost systems. Furthermore, the intense global competition of the 1980s has made decision errors due to poor cost information more probable and more costly. Over the years the increased opportunity cost of having poor cost information, and the decreased cost of operating more sophisticated cost systems, increased the demand for more accurate product costs. It is against this background that ABC has emerged. ABC, however, is nor a recent innovation. Fifty years ago Goetz (1949) advocated ABC principles.
Some important activities & cost driver : Activity Cost Driver
Machine set-up Number of production runs Purchase materials Number of orders placed Warehousing Items in stock Material handling Number of parts Inspection Inspection per item Quality testing Hours of test time Receiving material Number of receiving orders Packing Number of packing orders Store delivery Number of store deliveries Line item ordering Number of line items
The main steps are
Step 1 :
The emergence of ABC systems
During the 1980s the limitations of traditional product costing systems began to be widely publicised. These systems were designed decades ago when most companies manufactured a narrow range of products, and direct labour and materials were the dominant factory costs. Overhead costs were relatively small, and the distortions arising from inappropriate overhead allocations were not significant. Information processing costs were high, and it was therefore difficult to justify more sophisticated overhead allocation methods.
Today companies produce a wide range of products; direct labour represents only a small fraction of total costs, and overhead costs are of considerable importance. Simplistic overhead allocations using a declining direct labour base cannot be justified, particularly when information processing costs are no longer a barrier to introducing more sophisticated cost systems. Furthermore, the intense global competition of the 1980s has made decision errors due to poor cost information more probable and more costly. Over the years the increased opportunity cost of having poor cost information, and the decreased cost of operating more sophisticated cost systems, increased the demand for more accurate product costs. It is against this background that ABC has emerged. ABC, however, is nor a recent innovation. Fifty years ago Goetz (1949) advocated ABC principles.
Some important activities & cost driver : Activity Cost Driver
Machine set-up Number of production runs Purchase materials Number of orders placed Warehousing Items in stock Material handling Number of parts Inspection Inspection per item Quality testing Hours of test time Receiving material Number of receiving orders Packing Number of packing orders Store delivery Number of store deliveries Line item ordering Number of line items
The main steps are
Step 1 :