Activity Based Costing - Assignment Example

ABC is said to have addressed some important issues which traditional cost accounting may have left hanging when it comes to the question of reason or logic in cost allocation. Comparing the two methods of allocating cost, Emblemsvag (2010) highlighted three salient points of ABC:

1. ABC assumes cost objects consume activities whereas traditional cost accounting assumes cost objects consume resources,
2. ABC uses drivers at various levels (hence consumption, and therefore cost varies at all levels), while traditional cost accounting usually employs volume related allocation as bases for costs, and
3. ABC is process-oriented, while traditional cost accounting is process-oriented.

Higher productivity as a desired goal or objective, therefore, is better achieved using activity-based costing than traditional cost accounting. This is because ABC allows management to analyze systematically the processes involved in each system, rather than just observing how resources are consumed or utilized at the end of the line. Given this opportunity to study each step in the process and analyze the productivity of each step gives management a wider berth to implement measures for higher efficiency and productivity on the use of resources, i.e. transfer resources where they are much needed, or reduce allocation where it is over-capacity. Emblemsvag (2010) has further emphasized this point by saying that “the benefit of the ABC mindset is that it opens up a much wider array of measures in improving productivity”.  Such opportunities may not be readily available in a traditional cost accounting system, making ABC the wiser choice for managers' productivity.

Therefore, ABC is a tool that has proven to be a valuable tool for efficiency and productivity performance, and probably an indispensable method of cost allocation and cost accounting for modern organizations. Many more typical benefits of ABC have been cited (Value-Based Management, 2011), and among them are:  

• Ability to identify the most and least profitable customers, products, and channels,
• Ability to easily identify the root causes of poor financial performance,
• Ability to track costs of activities and work processes,
• Equip managers with cost intelligence to better drive improvements,
• Meet important marketing objectives, such as determination of a better marketing mix, enhancement of bargaining power with customers, and achieve better positioning of products in the market

From the above premises, it can be gleaned that ABC offers a better solution for any problem arising from overhead cost allocation. Definitely, ABC is an improvement of what traditional cost accounting aims to address, i.e., allocation of cost to where it matters most, keep costs down, and contribute to rising profit levels for the company through increased efficiency and productivity.

But is ABC really perfect? Has it become the eureka of overhead allocation, where a lasting solution has been found to last a lifetime? Is there a downside, a lowlight, anything that ABC would not be able to achieve? Is it the perfect cure?

There are some weaknesses when ABC is implemented by organizations. But such weaknesses or limitations are far outweighed by the almost “perfect cure” that is ABC and can even be considered as minor. Among the limitations that are frequently cited include (Accounting for Management 2011):

• It is expensive, and costly to maintain
• ABC produces results that managers are not accustomed to, as compared to traditional cost accounting
• The danger posed in misusing the data derived from an ABC
• Reports generated by ABC do not conform to generally accepted accounting principles, necessitating the preparation of two reports, one internal, and one external based on the traditional cost accounting.

Despite its limitations, ABC still presents the best option for modern organizations. All its limitations can be addressed, and the costs for such counter-measures far outweigh the benefits that ABC would produce for the company. Emblemsvag (2011) cited one marketing executive declaring ABC to be “revolutionary”. The premise is that ABC is not only a modern tool that is indispensable, it is also a powerful system that can provide a competitive advantage over rival firms. Indeed, ABC presents the perfect cure for the problem of overhead allocation, with a multitude of fringe benefits to go with it.