The Advantages and Disadvantages That May Arise for Plinkco from Introducing Activity-Based Costing - Case Study Example

Advantages and disadvantages of activity based costing Advantages and disadvantages of activity based costing With the current economic scenario changing so rapidly, the intense growth of market on global scale has increased the competition domestically as well as internationally. Organizations now seek solutions for their problems that will be more efficient but cost lesser. Managers started to demand such systems which can give them more precise and detailed information about cost analysis and cash flows which can support them in their decision making choices. The foremost choice of all business organizations is to produce such products and services that have lower cost than the competitors and along with it profit margins also increase. The automation of the goods and financial market intensified the impact of timely and precision based decision as the cost structure is much more complex today than in the past. The problem of cost management by traditional cost accounting methods were becoming obsolete as the markets are now not labor intense but depend upon the technological change and so the activity based costing system has been brought into the market because of the increasing lack of relevance of traditional cost accounting methods. Comparison between the ABC activity based costing and traditional costing system has shown three major differences, the conventional accounting methods refers the cost objects consume resources while in ABC activities are the cost objects. The former utilizes volume related allocations whereas ABC uses cost drivers. Traditional costing method is structure oriented while activity based costing is process oriented (Directessays.com, 2015).  Activity-Based Costing is basically the costing method where cost starts from detecting activities till the production of the product. Simply we can say that its process costing method that observes all the activities involves in producing the product. Activity based costing acknowledges that organizations cannot control costs but rather the activities that are the cause of these costs. Now as the management accountant for Plinkco Plc I have to introduce Activity Based Costing (ABC) and before adopting this system for overhead absorption let’s discuss its advantages and disadvantages both to Plinkco. So first I will start from the positive aspect of introducing ABC and comparing it with conventional costing system. The conventional costing system with setup cost and adjusted time is mentioned as overhead and classifies into different products depending on direct labor time whereas in Activity-based costing, all is followed for each with the direct charging to every product so by doing this, plinkco can settle or discover the main factors that influence every main activity. Not only this but also the cost of these main activities and show the link between these activities and producing products. So by implementing activity-based costing, can get more efficient, relevant and dependable product cost calculation as it is more towards the link between cost in relation to activities for producing goods. Obsession of offering cost for multi-items under action based costing is reasonable and right on the grounds that overheads are distributed on the premise of applicable expense drivers. Not only this but control of overheads comprising of altered and variable gets to be conceivable by controlling and observing exercises. Linkage in the middle of expense and exercises are unmistakably recognized in activity-based costing and subsequently gives chances to control overhead expenses. Sufficient data can be gotten to settle on choices about the gainfulness of diverse product offerings. Reasonable designation of overheads possesses an extensive partition in the aggregate expense parts (Small Business- Chron.com, 2015) ABC also can enhance business processes for Plinkco as an ABC framework designates circuitous expenses focused around an items expense driver, or the variable that makes the expense. As expenses are allotted every item, a picture begins to develop of which business methods are performing admirably and which ones need to be made strides. ABC can be utilized to distinguish non-esteemed added exercises and can help to better dispense assets to proficient and beneficial exercises. The utilization of ABC can likewise increase the value of the persistent change of business techniques by Plinkco. ABC can also recognize wasteful products for Plinkco in a way that the ABC strategy represents costs like the way creation work is performed, permitting your business to better comprehend where overhead expenses are going. The information can distinguish inefficient items and unnecessary expenses, with the goal that assets can be utilized gainfully. The technique additionally serves to alter the cost of items or administrations that are intemperate or inaccurate. General item and administration quality can enhance as ABCs information subtle elements generation and expense issues that need to be determined. ABC can also be helpful in Circulation cost for Plinkco. The normal organization like plinkco utilizes an assortment of circulation channels to offer its items, for example, retail, Internet, wholesalers, and mail request indexes. The greater part of the structural expense of keeping up a dissemination channel is overhead, so in the event that can make a sensible determination of which appropriation channels are utilizing overhead, so can settle on choices to adjust how dispersion channels are utilized, or even to drop unrewarding channels.We have now landed at a complete ABC assignment of overhead expenses to those expense protests that should be accused of overhead expenses. Thusly, chiefs can see which action drivers need to be diminished to psychologist a comparing measure of overhead cost. Case in point, if the expense of a solitary buy request is $150, supervisors can concentrate on letting the creation framework naturally put in buy requests, or on utilizing obtainment cards as an approach to keep away from buy requests. Either arrangement brings about less buy requests and thusly lower buying division costs.Activity-based costs (ABC) is intended to track the expense of exercises, so you can utilize it to check whether movement expenses are in accordance with industry models. (Accountingtools.com 2015).  With all these advantages the activity based costing has various pitfalls which Plincko must consider before opting for this new fashionable costing technique. ABC (activity based costing) has its limitations and drawbacks .ABC can be time consuming and costly as for the implementation of ABC a trained professional consultant needs to be hired so the system can be installed and the maintenance and update of the system is required for efficient estimations, the most challenging is the implementation of ABC in a business’s operational process as the managers responsible for the estimation of cost need training and help to understand the complex system. Moreover the ABC takes longer processing time to generate results, as it breaks down each activity into simpler and basic components to analyze the cost associations (Donovan, D. and Donovan, D.2013).  A common problem if dealing with ABC system is the misinterpretation of data, this is because this system functions differently than the traditional cost method and it is possible that certain activity based costs are irrelevant in the decision making scenario for instance if an airplane takes off half-filled and the cost per passenger based on full capacity is $300 and the number of seats in the plane are 150. The airline charges $400 from each passenger but if the airline charges $299 from the last minute passenger, it can fly the airplane completely filled. But the cost of the ticket is fixed for most of the airlines, so the decision making about the profit and loss per flights reported on these data is simply faulty, as neither the cost per passenger based on full capacity nor the cost per passenger based on actual capacity is relevant for this particular cost estimation and decision making (Anon, 2015). ABC is relatively a new technique and the cost of maintenance and implementation may exceed the total benefits of improved accuracy gained from the ABC system, the organizations belief that using an ABC system can solve the problem of determining the appropriate cost drivers and efficient cost estimation to be beneficial, but it may be the case that all cost drivers are not identifiable for every cost or a single cost driver for any cost that is identified by the system may not explain the cost behavior of all the cost associated items (Cat-acca-resources.blogspot.com,2015).  In specific activities to allocate all overhead costs is not possible, so the ABC system benefits get limited if the overhead costs are primarily volume related or are in small proportion of the total cost. The ABC system gives the output in a minutely detailed and explained form which may provide too much unnecessary detail obscuring the details and information required this can be a barrier in efficient and precise decision. Sometimes the result generated after processing from an activity based costing system are quite confusing and misleading, for the system regards linear, absolute or certain relation between the activities and the resources. Due to all these flaws and drawback the organizations decision choices may be altered leading to undesired results and unexpected output ( Kfknowledgebank.kaplan.co.uk,2015). References Donovan, D. and Donovan, D. (2013). Pros and Cons of Activity-Based Costing. [online] Dun & Bradstreet Credibility Corp. Available at: https://www.dandb.com/smallbusiness/pros-and-cons-of-activity-based-costing/) [Accessed 15 Jan. 2015] Anon, (2015). 1st ed. [ebook] Available at: http://www.boazronen.org/PDF/Relevance%20Lost%20-%20The%20Rise%20and%20Fall%20of%20Activity%20Based%20Costing.pdf [Accessed 15 Jan. 2015]. Cat-acca-resources.blogspot.com, (2015). CAT - ACCA Resources: Disadvantages and Criticisms of ABC. [online] Available at: http://cat-acca-resources.blogspot.com/2010/06/disadvantages-and-criticisms-of-abc.html [Accessed 15 Jan. 2015]. Kfknowledgebank.kaplan.co.uk, (2015). [online] Available at:http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/Activity%20Based%20Costing%20(ABC).aspx?tagName=Activity_x0020_based_x0020_costing&weburl=http%3a%2f%2fkfknowledgebank.kaplan.co.uk&listid=1d06790a-eef1-4037-8b41-f862a89ff68e&Source=http%3a%2f%2fkfknowledgebank.kaplan.co.uk%2fKFKB%2fWiki+Pages%2fActivity+Based+Costing+(ABC).aspx [Accessed 15 Jan. 2015]. Accountingtools.com, (2015). Activity Based Costing - AccountingTools. [online] Available at: http://www.accountingtools.com/activity-based-costing [Accessed 15 Jan. 2015]. Small Business - Chron.com, (2015). The Disadvantages & Advantages of Activity-Based Costing. [online] Available at: http://smallbusiness.chron.com/disadvantages-advantages-activitybased-costing-45096.html [Accessed 15 Jan. 2015]. Directessays.com, (2015). Essay on The Activity-Based Costing. [online] Available at: http://www.directessays.com/viewpaper/89851.html [Accessed 16 Jan. 2015]. Read More