Conventional Cost Allocation Systems versus Activity Based Cost Systems - Essay Example

 Convectional Cost Allocation Systems versus Activity Based Cost Systems Cost management is a very significant aspect in accounting. Courtesy of the changing trends characterized by technology, need for simplicity as well as maximization of resources costing systems is changing. This has attracted diverse opinion from the accounting professionals as well as the business owners. There has been a debate on whether the convectional cost allocation systems such as the use of the general ledger system should be completely replaced by the activity based cost (ABC) systems.

This essay attempts to establish various positions that have been taken by different authors. Quite a number prefer the ABC systems over the traditional cost allocation systems. One issue that has been pointed out when comparing the cost systems is the accuracy. Martin (59) argues that the ABC systems are more accurate than the convectional system. The information that is delivered through this system is more precise and can help the management in decision-making. This means for effective use of this system there should a combination of the internal decision making with the extern al reporting system (Kaplan 58).

The fact that there are no details that are assumed by the ABC system according to her proposition. In support of the convectional systems, the issue of efficiency and effectiveness arises. While the ABC system is efficient it provides so much details that are not necessary for the day-to-day running of the business (Cooper and Robert 1). . These details accumulate to make a huge workload that is unnecessary. On the other hand, the convectional systems provide only the required details. The facts that stockholders as well as creditors have no interest in knowing the product that generate more profit neither the customers.

However, the ABC system can be advantageous over the convectional system because it does not assume any detail hence there are high chances of increasing profitability due to the well-kept inventory (Cugini and Oilonato 127). Another issue raised is the ability of ABC systems to increase the company’s competitiveness. Some of the opponents of ABC systems have argued that ABC systems are not the only solution that faces the business world. The argument has been, there is need for the systems to be complementary instead of having to compete (Martin 70).

He proceeds on to argue that despite the accuracy in costs that comes with the system, the issue that should be addressed to increase the company’s profitability is a change in processes. The process is faulted for having no mechanisms for process management but instead it is a focus on the financial results. The ABC system has been applauded as a very powerful tool in management. It is very beneficial in cost management compared to the convectional system. Its input may seem insignificant but Kaplan (58) argues that it is good for the well-being of both short-term and long term financial position of the company.

He points out that the system is capable of providing economic information that is mainly required by companies that are focused on improving their processes in order to increase profitability. In conclusion, the proponents of the ABC system stand with the view that the system is more beneficial for both the business and the management. On the other hand, the convectional systems have been applauded for the ability to provide the required details. There is a consensus that there is need for adoption of the ABC system.

Works CitedCooper, Robin, and Robert, Kaplan. "Activity-Based Systems: Measuring the Costs of Resource Usage." Accounting Horizons 6.3 (1992): 1. ProQuest. Web. 11 Feb. 2014. http://search.proquest.com/business/docview/208915804/65713DD57DAD4510PQ/5?accountid=45049Cugini, Antonella, and Silvia Pilonato. "The Cost Accounting System in B-to-B Service Companies: Cost Centers Or Activity-Based Costing?" GSTF Business Review (GBR) 2.4 (2013): 122-9. ProQuest. Web. 11 Feb. 2014. http://search.proquest.com/business/docview/1437608399/fulltextPDF/65713DD57DAD4510PQ/3?

accountid=45049Kaplan, Robert S. "In Defense of Activity-Based Cost Management." Management Accounting 74.5 (1992): 58. ProQuest.Web. 11 Feb. 2014. http://search.proquest.com/business/docview/229829751/65713DD57DAD4510PQ/12?accountid=45049Martin, James. R. A Controversial Issues Approach to Enhance Management Accounting Education. Journal of Accounting Education, 12(1): 59-75. 1994.