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Activity Based Costing - Essay Example

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It divides it into quantifiable and discrete activities (Lawrence, 2004). Traditional volume-based costing methods concerns the cost, specifications, and scope for each job order…
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Activity Based Costing

Download file to see previous pages... Conventional costing methods have caused problems in their implementation in most companies. This is because of the constant change in technological advancement which requires the use of modern methods of costing. The use of the ABC system creates difficulties in the separation and allocation of some overhead costs on a product unit. For instance, the Chief Executive Officer’s salary does not provide the management with the appropriate reports on costs. The ABC method allocates business cost on a proportionate basis to products or based on assumptions (Lawrence, 2004). This makes inaccurate reports on costs to be generated to the management. Some of the traditional methods of costing ensure accuracy of information which can lead to a competitive advantage. ABC is a costly method as compared to the traditional methods, but it is the most efficient.
In planning implementation of ABC method, it is important to identify key purposes of the information that the method will provide. A well designed ABC method can form the basis of improved budgeting and capacity of resource planning (Lawrence, 2004). Organizations need to understand their cost structures and have a cost management system that supports the understanding. Effective management of both ABC and the conventional methods may have greater profitability to the ...Download file to see next pagesRead More
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