The allocation of overheads has always been a matter of concern in manufacturing businesses especially in recent times. The method used in allocating overheads plays a role in the determination of the comparability of the costs of doing business vis-à-vis the cost to competitors. …
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In fact Geri and Ronen (2005) indicate that cost accounting systems do not normally command a high ranking in the hierarchy of most organisations, it is the information that they generate that plays a critical role in the performance of organisations and in the decision making process. The range of systems available and the claims made by the proponents of each have led to several debates. However, some of the arguments have some merits in as much as they allow for a better understanding of the methods that are being utilised. Some of the techniques and systems in use are of traditional management accounting domain while others are of the more recent strategic management accounting domain. Some of the criticisms that have been put forward in relation to traditional systems are that they fail to provide the necessary information that would improve the strategic decision making process (Johnson and Kaplan, 1987; Bromwich and Bhimani, 1989; Roslender and Hart, 2003). Suggestions like these are based on the perceived inability of the traditional systems to provide information that would make the organisation more competitive and therefore improve long run performance. In fact, Benjamin et al (2009) indicates that the inefficiencies of traditional systems especially in the area of absorption costing in coping with modern business environments have been of great concern. The gaps that are thought to exist as well as changes in the manufacturing industry including the move from being labour intensive to being capital intensive have provided the impetus for innovation in this very critical area of business (Benjamin 2009; Chenhall 2003; Lukka and Shields 1999). Johnson and Kaplan (1987) indicate that this change can be found in the application of ABC to manufacturing concerns. This paper looks at two forms of full costing systems - traditional absorption costing and the more recent activity based costing (ABC). Both methods take a different approach in assigning cost to products. 1.1 Absorption costing Absorption costing has it roots in the manufacturing industry (Benjamin et al 2009). BPP (2011) indicates that the objective of this method of costing is to include an appropriate share of an entity’s overheads in the cost of a product. What is appropriate should be reflective of the time and effort that was used in the production of the product. The method becomes complicated when an organisation produces a mix of products and activities or resources used do not bear any relationship with the volume of items produced. Geri and Ronen (2002) indicates that the use of this method requires the allocation of a proportional rate of the fixed cost of production to units produced but which has not yet been sold (Geri and Ronen 2005). 1.2 Activity Based Costing Activity based costing (ABC) was developed as an alternative to absorption costing. (BPP 2011). This method of costing identifies the cost drivers of the activities of an entity’s production process. Overheads are then charged to products based on how they utilise a particular activity. 2.0 Literature Review This review while critically assessing the literature examines the features of two costing methods and looks at the justification for their use. It also provides a comparison while it examines the advantages and disadvantages of using
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“Traditional Absorption Costing Versus Activity Based Costing Assignment”, n.d. https://studentshare.org/finance-accounting/1402483-traditional-absorption-costing-versus-activity-based-costing.
1. Activity Based Costing (ABC) is the perfect cure for the problem of overhead allocation within organisations. Critically evaluate this statement.
In general, activity based costing (ABC) has been largely described as an alternative method of allocating overhead costs based on logic rather than arbitrarily imputing cost entirely to resulting production output.
Financial accounting mainly focus on summaries past financial dealings which are reported periodically in contrast, management accounting evaluate past, present and future information which are reported continually to be used in making appropriate decisions.
Accounting for decision making Contents Contents 2 Introduction 3 Effectiveness of Traditional and Activity Based costing system 7 Effectiveness of Traditional Based costing system 7 Effectiveness of Activity Based Costing 10 Conclusion 13 References 14 Introduction Costing systems are types of information systems which require a particular type of information like the number of units produced and the number of direct labour hours of value that are involved in the process. These data are put as input into the costing system and the specific methodology of the costing system is used to produce information like the cost of the product and other important information as the output. The same da
TABLE OF CONTENTS Executive summary 2 Assumptions of marginal costing 3 Uses of marginal costing in short term decision making 3 Types of costing methods 4 Marginal costing absorption method 5 Advantages of Marginal Costing over Absorption Costing 6 Recommendation 7 Conclusion 7 Costing is one of the managerial accounting functions which needs a careful selection and evaluation of the effectiveness of every technique used by a firm.
It has been observed that ABC method is the most sought after innovation in the field of management accounting in the last two decades. The method was originated in the Unites States of America during the 1980s as an improved system to enable better cost allocation by means of classification of more costs as direct
by increasing the production of the product and as such produced 45,000 units with a thought that by putting the pressure, the selling agents could push the products more than the estimated sales into the market. However, only 20,000 units could be sold for which the profit
sically encompasses the estimation of the costs of goods and services so as to provide information to management and facilitate management decision making. As such in deciding between various costing methods one must keep the ultimate objective in mind: which method is most
ion of data used in making reports to the management apart from the same data being integrated into the accounting system of the company (MeÌvellec 2009). The information from the costing system data makes the stakeholders of the company to grasp the status of their dealing in
The Activity Based Costing (ABC) is used to assign higher overheads or indirect costs to the direct costs as compared to the traditional costing methods like the absorption costing method (Collier, 2012). The main features of
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