Activity-Based Costing: Is It Still Relevant - Essay Example

?Section Introduction This report is based on the article ‘Activity-Based Costing: Is It Still Relevant?’ written by Startton, Desroches, Lawson and Hatch. The article addresses one of the most important questions whether the activity based costing should be used in organisations or not and whether the use of this costing technique is applicable even today or not. The reason for selecting this article is that costing technique is important in identifying different expenses and costs and by properly identifying these expenses and costs the management is able to reduce the overall costs of the organisation and improve its profitability. However the main question for accountant and financial analysts in organisations around the world is which technique should be used for this purpose (Krumwiede, 1998). Activity costing method has been used widely across the world (Brimson, 1991) however there are several other costing methods being used by the organisations around the world like actual costing, normal costing and standard costing methods (Liu, & Pan, 2007). Activity costing method is a different type of costing method in which different activities of the organisation are identified and cost is assigned on each activity on the basis of actual consumption of each activity (Gupta, & Galloway, 2003). In this costing method, both indirect costs and direct costs are considered thus helping the analysts to calculate total costs rather than direct costs of the organisation (Askarany, Yazdifar, & Askary, 2010). This article is based on the research conducted about the relevance of activity based costing method and its benefits. However the article overlooks some of the important disadvantages of this costing system. In their research, employees at all levels were considered as respondents. Respondents of this research included executives, senior managers, directors, analysts, managers and other designations. Section 2: Summary of the article In this article, authors have worked on identifying the best accounting method that should be used by the organisations around the world. In this article, the authors have conducted surveys from 348 respondents and they have asked different questions related to activity based costing. The main purpose of this article has been to identify whether activity based costing method is still relevant in today’s world and whether it is better than other costing methods that have been used by organisations around the world. The article identifies and analyses different costing methods that an organisation can use and examines which method can be best for the organisation (Startton, Desroches, Lawson, and Hatch, 2009). There have been several questions raised regarding the use of activity based costing method as this method have provided less than desired results. There have been many firms that have stopped using activity based costing method because the method was very complicated and required extensive time to calculate the cost. Also with the complexities involved in the organisational processes, it became difficult to use activity based costing method. Because of complexities and time involved this method becomes even more expensive and many organisations have abandoned this method and shifted to other costing methods. Therefore the research makes this article an important one considering today’s situation as people would like to know which costing method is best suited. Costing is an important part for any organisation (Argyris, & Kaplan, 1994) as with the help of costing an organisation is able to recognise whether they are making profits or not. Also without using costing method, an organisation cannot find out whether they should continue the way they are operating or they need to change their processes in order to improve their profitability. Also costing methods can be helpful in identifying important areas in which most of the cost is being incurred and therefore steps can be taken in order to minimise these costs. In this article, several questions have been asked from the respondents regarding activity based costing method and other costing methods used within the organisation. Important issues have been highlighted in this research as people have agreed with several benefits that activity costing method can provide. Some of the important benefits regarding activity based costing methods are as follows: It helps in making product decisions like pricing, designing, outsourcing etc It is helpful in analysing whether the product is profitable or not (Bromwich, & Hong, 1999) With the information about costs of the product, it is helpful in analysing costing/ profitability system It helps in budgeting, planning and evaluation (Hicks, 1992). It is helpful in controlling costs. It helps in giving much better and accurate costs. It is helpful for managers for decision making purposes (Cokins, 1996). Also the article compares activity based costing method with other costing method and according to research it has been found that activity based costing method is able to trace activity costs as well as overhead costs to final costs objects in a better and more accurate way. The following graphs reflect the responses from the respondents regarding whether ABC methods are able to trace more accurately or Non-ABC methods (Startton, Desroches, Lawson, and Hatch, 2009). Despite of the benefits of activity based costing methods there are several concerns still that financial analysts and management have in their mind regarding activity based costing and these concerns are: Still, the management and analysts are trying to find a better way to allocate costs despite of using activity based costing. Allocations do not reveal the extent to which resources are utilised Information provided is not timely Updating and improving the system is difficult According to research 87% of the respondents feel that an ideal costing system of the organisation would include activity based costing system. Currently, there are almost half of the organisations that involve activity based costing system however, considering this believe of people about the benefits and importance of activity based costing system, in future there would be more organisations inclined to use and implement activity based costing system in their organisation. When questions about the concerns of the costing system was asked from the respondents then people have respondent that they would prefer activity based costing method to be better and well-equipped to meet their needs in comparison to other costing methods. In addition to this, it has been revealed from this research that activity based costing method is helpful for the management to make important decisions. It has been found that organisations which have implemented activity based costing methods are in a better position to make financial decisions on the basis of activity based costing. Similarly, the management of organisations that have implemented activity based costing method is able to make operational and strategic decisions better as the activity based costing system supports them. Also this system is integrated with budgeting and planning process thus it is helpful in making different decisions. The following graph reflects the answers of respondents about questions regarding the costing system and their role in decision making. The higher value of activity based costing reflects that people prefer this method in comparison to other costing methods. (Startton, Desroches, Lawson, and Hatch, 2009) In addition to this, it has been found from the research that activity based costing system is better in terms of analysing the profitability of customer as well as product. According to research, almost 60% of the respondents believe that customer profitability can be better identified with activity based costing system in comparison to 35% of the respondents that believe non-ABC method can be helpful. Similarly, there were more than 60% of the respondents who felt that product profitability can be better calculated with ABC method whereas only 45% of the respondents believed that non-ABC system can be helpful for this specific purpose (Startton, Desroches, Lawson, and Hatch, 2009). Surveys have been conducted to collect information for this article. The respondents of the research included people from different hierarchical levels as respondents of the research included executives (16%), employees from senior management (16%), managers (23%), directors (13%), analysts (19%) and others (14%). Therefore with respondents are diversified so the response includes the view of people working at all levels. In addition to this, the research collected information from different geographic location however more than half of the information was collected from North American region (52.1%) followed by Europe (13.9%) and Middle East (12.8%). As the research has analysed the costing methods and their impact on the organisation from different geographical location thus making the research valid and more reliable. Also the research considered manufacturing industry, service industry as well as not for profit and government organisations thus the responses reflect better picture of the actual situation and views (Startton, Desroches, Lawson, and Hatch, 2009). The research has been helpful in identifying that activity based costing method is able to better analyse, consider and address the overhead costs in comparison to others methods. Also activity based costing is helpful in decision making and analysing the profitability of products in comparison to Non-ABC methods. Section 3: Critical evaluation This article has been helpful in analysing whether the activity based costing system is still applicable and relevant despite of the fact that several organisations have stopped using the system. With the research conducted in the article, it has been revealed that activity based costing system is still one of the most widely recognised systems to identify and calculate costs in a better way and it is helpful in planning and budgeting of the organisation. This article covers important benefits and identifies importance of activity based costing system. Activity based costing system is able to better analyse the costing system of the organisation (Turney, 1991) and with this, the management is able to better plan and budget their expenses and revenues (Gosselin, 1997) thus it is helpful in making important decisions. The research does not include several disadvantages of activity based costing system and the questions that have been asked from the respondents include only the advantages and benefits that activity based costing system has and excludes the disadvantages. It would have been better if questions related to the limitations and disadvantages of activity based costing system have been included and asked from the respondents so that the view from both perspectives could have been analysed. There are several disadvantages of activity based costing system like the process is very complicated (Baines, 1992) and time consuming and as the process is time consuming therefore it is expensive as well. Activity based costing method does not conform the Generally accepted accounting principles (GAAP) therefore any organisation that use activity based costing then it will have to again do the costing (Tsai, 1996). In addition to this, it is difficult to divide or allocate each and every cost of the organisation (Innes, Mitchell, & Sinclair, 2000). Also when organisations use activity cost based method then the focus of the management tends to shift towards cost minimisation instead of profit maximisation (Cagwin, Bouwman, 2002) as they are looking to identify small costs that could be saved (Mikovcova, 2008). Therefore such important questions should have been addressed and included in the survey in order to improve the quality of the research question. Section 4: Reflective views The article has been prepared after considerable research and the data collected is valid and very informative. An important issue regarding the costing method has been raised in the article and it has been helpful in identifying and revealing important benefits of implementing activity based costing system in an organisation. However the article does not consider the disadvantages and complications that are involved in the ABC method thus it has portrayed story from only one angle. My personal experience when it comes to activity based costing system has been very awful as once I was asked by my manager to calculate the activity based costing and for that I had to collect a lot of information which required considerable amount of time and a lot of research. In addition to this, once I was able to collect required information then I was supposed to calculate overall costs including the overhead costs and then allocate it accordingly. The whole calculations took a lot of time then initially what I expected although I was helped throughout the way by my supervisor and other team members but the process was highly complicated and time consuming. Though after I was able to prepare the ABC for my organisation, the manager appreciated my efforts and shared important information that the top management has used the same costing prepared by me for decision making purposes. I agree with the benefits that are mentioned in the article as I have personally experienced all these things in my professional life. Section 5: Conclusion Activity based costing has been one of the most widely techniques implemented by organisations in order to better calculate the cost of the organisation (Innes, Mitchell, 1995). The method has been helpful for the management in decision making processes (Kaplan, & Anderson, 2007) and this costing method is helpful in analysing the overall costs of the organisation in a better way and this is one of the reasons why activity based costing has been implemented by organisations around the world regardless of the fact that this costing method is time consuming for the accountants and need extensive research and accountants should have a good knowledge about the overall system and processes of the organisations. This article analyses important benefits and analyses how activity costing method can be helpful for organisations in their decision making processes, in analysing the profitability of a customer or a product, in improving costing processes and in tracing the cost in a better way. Therefore this article has been helpful in highlighting the important benefits of activity based costing as well as it has been helpful in determining the main benefits of activity based costing method and how people in the organisation feel about this costing system. Though, the questions asked from the respondents have been only related to the benefits of activity based costing and different questions related should have also been asked like frustration of an individual doing activity based costing, or time consumed or taken by an individual or the cost of such method as these questions would have been helpful in determining both the advantages and disadvantages of the costing system. Activity based cost is very helpful in analysing the profitability of a customer or a product (Roodhooft, & Konings, 1997). In addition to this, this costing system alleviates the concerns of managers about cost allocation. As the other costing system lacks to address accurate overhead allocation therefore activity based costing has been helpful in this regard (Kennedy, & Affleck?Graves, 2001). However, it is important for the management of the organisation to compare the advantages and disadvantages of activity based costing before implementing the system in the organisation as the process is time consuming, complex, expensive and can deviate the focus of the management from profit maximisation to cost minimisation. References Argyris, C, & Kaplan, R 1994, ‘Implementing new knowledge: The case of activity-based costing’, American Accounting Association, vol. 8, no. 3, pp. 83-83. Askarany, D, Yazdifar, H, & Askary, S 2010, ‘Supply chain management, activity-based costing and organizational factors, International Journal of Production Economics, vol. 127, no. 2, pp. 238-248. Baines, A 1992, ‘Activity-based costing’, Work Study, vol. 4, no. 2, pp. 12 – 13. 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Turney, P 1991, Common cents: The ABC performance breakthrough: how to succeed with activity-based costing, Cost technology, Hollsboro, OR. Read More