Section 3: Literature Review
Accounting Essay 代写 作业成本法是一种成本核算概念
Activity Based Costing
Limitation of ABC
Advantages of ABC
According to the chart, Activity Based Costing has the advantages and limitation when we are implementing in an organization. Hence, we will further explain about it as follows.
Advantages of of ABC
According to Carles(2001), he stated that several authors have described the main advantages of using ABC costing [Innes and Mitchell, 1990; Bellis-Jones and Develin, 1995; Malmi, 1997].,which as follows:
The product and service costing is more accurate, especially the non-volume -related overhead in the organization.
It is possible to analyze costs by areas of managerial responsibility and
customers by using the ABC.It helps to recognize the way in which customers directly influence the cost structure of the business. Hence, it helps to analyze customer profitability.
It is a cost behavior that makes people more understand.It is also identifying the costs of complexity, variety, and change inherent in both kind of service offered and customer-specific requirements.
Focuses on the value-added activities, which are those activities that create value to customers. On the other hand, the company should identify the non-value-added activities and try to eliminate them although the non-value-added activities that enables value adding activities to occur at the same time .
It is beneficial to performing capacity analysis which measures the costs of resources
used rather than the costs of resources supplied because that has the big difference being excess capacity. We will use the practical capacity, which means the capacity reflecting the maximum level at the efficient organization to undergo this analysis,
It reduces the risk of the company and provides a more useful decisions in the future. Therefore, it is not only depending on the analysis but also depending on its ability to using a correct diagnosis in the company's situation to make an organization successful.
Limitations of ABC
According to Peter F.Druker (1999), some companies that activity-based costing will cause spending too much time, effort and even money on gathering and going over the data that is collected. The manager annoyed in an organization because there have too many details that invovle in ABC. On the other hand, insufficient data will occur when we are lacking of details. The data provides in an organization will affect the results when using ABC . This will happens in businesses that were no intention of using ABC costing as main approach.
Besides that, an article aimed at certified public accountants who hard to support the new approach (activity-based costing) was written by Cokins(1999). Hence,in his articles, he explained that activity-based costing usually will show the best with small amount of detail and estimated more cost figures. However, he stated that when accountants try to apply ABC, they will try to achieve the obtain more accurate inormation that is both difficult to accomplish and need time to acomplish it. However, it will be likely to be a failure when people are going to apply it.
Furthermore, another article entitled "Overcoming the Obstacles to Implementing Activity-Based Costing" was also written by Cokins(2000). Hence, he noted that the managers ignore the cardinal rule so the activity based costing usually leads to a failure. Moreover,the advantage of average cost rates, many overly detailed information and the failure to connect information to action that proved that it also interferes with ABC projects. By knowing these concepts, Cokins(2000) agreed that CPAs can improve their roles as business partners and consultants.
In addition,another limitation is that activity-based costing software can be costly. Mark Henricks(1999)stated that most ABC practitioners find that special-purpose ABC software is required to make the task manageable and easy to undergoes in an organization.
Moreover, time can also be a factor for businesses seeking a quick fix which means that ABC costing can be successful in a short run .Continuingly, Henricks(1999) noted that although some companies see results almost instantly, it typically long time to experience the benefits of ABC.
According to Peter(1999), he stated that some overhead costs, such as chief executive salary, are difficult to be assigned to products and customers. 'Business sustaining' which are termed by the costs and are not assigned to products and customers because it is not meaningful to an organisation. Although someone may argue that costs cannot trace to activities should be "arbitrarily allocated" to products and it is important to realize that the main purpose of ABC is to provide accurate information to management. Hence, it cannot deny that any cost of the organization by using ABC approach, should be assigned in an arbitrary manner.
Steps in implementing activity based costing
According to Mr. Ian(2003), an ABC system involves the following stages as follows:
The major activities should be identified which happen in an organization.
Determine the cost driver for each main activity (for example, number of set-ups, machine hours, number of inspections etc.)
Create a cost pool for each major activity
The costs of activities to products (goods or services) according to the products to consumption of these activities (Using the extent to which the cost drivers are used as a measure of this demand)to be traced
Example:
Thus, the examples will further explain how the steps are undergone.
Assume Henry's Company produces two products, which are product 'A' and 'B'. Both of them are produced on the same equipment and undergoing same processes. The products will change with the volumes in which they are sold and therefore the volumes in which they are produced.
Product 'A' is a high volume product whereas product 'B' is a low volume item. The table shows the all details as follows:
Products
A Traditional volume based costing system would handle it this way:
Cost centre allocated costs RM420,000
Overhead rate per machine hour RM7 (RM420,000/60,000 hrs)
Overhead rate per direct labour hour RM6(RM420,000/70,000hrs)
Cost per unit of 'A' = RM28 (4 machines hours at RM7)
Cost per unit of 'B'= RM24 (RM6X 4,at RM6per hour)
Thus total cost allocated to product 'A' = RM336,000 (12,000 X RM28)
And total cost allocated to product 'B'= RM28,800(1,200 X RM24)
From the calculations,it shows the big difference by using the traditional volume based costing and ABC.
Section 4: Analyses and Discussion
Other than ABC costing system, there have another system called traditional costing system. It allocates overhead directly that is based on the basic of predetermined such as machine hours or the labor costs. Activity-based costing (ABC) provides information more accurate than traditional costing system because its assign overhead costs using the following steps that we mentioned at section 3.
Traditional costing system allocates overhead to products on the basic of predetermined plant wide that is using direct cost and machine hours. The total overhead cost such as depreciation on expensive plant, property and equipment, maintenance has increased in the rapid development environment. On the other hand, the amount of direct labor used in industries has been reduced. In this situation, it is not suitable to use the basic predetermined overhead rates based on direct labor because direct labor and overhead have no correlation.
It will happen the product costs being wrongly because the companies are using overhead rates based on direct labor. Companies prevent the distortion by using the machine hours as the basic to allocate overhead in an automated manufacturing. Manufacturing process is complex, only machine hour is not fulfilling to allocating all the overhead cost. In this situation, managers decide to us "activity based costing".
Michael H. Granof Professor, David E. Platt Assistant Professor and Igor Vaysman Assistant Professor had done some researches about the ABC. They had analyzed about the difference between ABC and traditional costing.
The table below shows the differences between traditional costing and activity-based costing.
Traditional Costing Systems
ABC Costing Systems
Cost pools
Accumulate costs into departmental cost pools.
The costs in each cost pool are heterogeneous because they are costs of many major processes and generally are not caused by a single factor.
Accumulate costs into activity cost pools, which are designed to correspond to the major activities or business processes.
By design, the costs in each cost pool are mainly caused by a single factor called 'cost driver'.
Allocation base
Allocate costs to products using volume-based allocation bases such as units, direct labor input and machine hours.
Allocate costs to products, services and other cost objects from the activity cost pools by using allocation bases corresponding to cost drivers of activity costs.
Cost object
Focuses on the cost of the single cost object (e.g. unit of product or service)
Focuses on the costs of many cost objects of interest (e.g. units,batches, product lines and business processes).
Cost
Inexpensive to use and maintain.
Expensive to use and maintain.
Decision support
Leads to overcosting and undercosting problems.
As they unable to align allocation bases with cost drivers
Provides more precise information to support the decision made by an organization.
As they able to align allocation bases with cost drivers
Cost control
Considered as departmental exercise rather than a cross functional effort.
By providing summary costs of organizational activities,they allow for prioritization of cost-management efforts.
Example of ABC and Traditional costing
Now we will have an example for making decision to pricing and production by using ABC and traditional costing.
Assume that the Craze Ball Company produces two types of bouncing balls; one has a hollow center and the other has a solid center. The same equipment is operated to produce the balls in different runs. Between batches, the equipment is cleaned, maintained and set up in the proper form for the next batch. The hollow center balls are packaged with two balls per package whereas the solid center balls are packaged one per package. During the year, Craze Ball expects to produce 1,200,000 hollow center balls and 1,400,000 solid center balls. The overhead costs incurred have been allocated to activity pools as follows:
