ACC501 - Accounting for Decision Making, Mod 5 SLP - Essay Example

Activity Based Costing and the ASPCA of the of the Activity Based Costing and the ASPCA Introduction Revenues, costs andexpenses are three important items that can make or break a business enterprise and dictate its survival or failure. Whether profit or non-profit oriented, a business has to take care of its assets and liabilities and plan its financial future. In the absence of good and astute planning, any business becomes risky and uncertain. Activity based costing is one of the best methods to handle the cost elements in an organization.

It is both logical and simple to employ, and the benefits too are easily visible. This paper will have a look at how activity based costing can be adopted at the ASPCA and the benefits that it would entail. Discussion Activity based costing is based on the simple yet effective premise that it is the productive activities in an organization that are affecting the costs borne by a business enterprise. Activity based costing thus allocates or apportions the costs of production to the activities that are being carried out in the manufacture of these products.

It further apportions the costs to the products that result from the activities. Traditional costing methods were invented in the late 19th century when work was highly labor-intensive; however modern manufacturing techniques are based more on technological innovations and require a minimum of labor along the production lines. For example, robotic technology is used to manufacture cars along an assembly line in the automotive industry. This is why ABC method of costing is preferred today. The concept of ABC was invented in the 1970s and has been used in a variety of organizations.

Through ABC method, we can allocate indirect costs such as factory overhead first to the production activities such as machine hours, and then apportion the total costs of manufacture of a single unit of production based upon machine hours used for that product (Investopedia, 2011). Taking the case of the ASPCA, it can be seen that the cost of manufacturing animal shelters is an activity that lends itself to ABC method (ASPCA, 2011). This is because the specific activities involved in the process of making these shelters are well known, and cost drivers can be ascertained and used to allocate costs to these activities.

The costs and cost drivers for this allocation are likely to be as follows: Activity Activity Level or Resource Cost Driver Direct Materials Per Unit Direct Labor Per Unit Machine Hours Per Unit Number of Shelters Made Per Job or Batch Created Personnel Number of Workers Storage Square Footage of Space Used Looking at their 2010 financial statements, other activities that lend themselves to the Activity Based method of costing would be the cost of community involvement in supporting an animal that is being carried out in various States, and the Pet insurance scheme.

The cost drivers and resource allocation methods are likely to be the same as above (ASPCA Annual Report 2010). Conclusion The process of developing an ABC system for the ASPCA would be relatively simple and would include (1) identifying resource costs and activities; (2) assigning costs to activities; and (3) assigning activity costs to cost objects. The benefits to ASPCA in following the ABC method are better measures for profitability, decision making and process improvement. References ASPCA Website (2011): Accessed on 18 Sep 2011 at http://www.aspca.org/ Investopedia (2011): What is Activity Based Costing?

Accessed on 18 Sep 2011 at www.investopedia.com/terms/a/abc.asp ASCPA Annual Report (2010): Accessed on 18 Sep 2011 at http://onlinedigitalpubs.com/publication/?i=76489