Activity Based Costing and Management Systems - Essay Example

Topic: Activity Based Costing and Management Name: Lecturer: Course name: Course code: Date: Introduction This paper reflects the organizational strategies on implementation of Activity-based costing and Activity Based Management costing systems. The research identifies that ABC/M Costing techniques as a define magnitude on installation while if the systems are critically effected it serves a significant role in the organization. ABC/M costing techniques are considered to positively contributing to the business firms as they expresses how resources are assigned to activities, and the rate at which activities are allocated to cost objects based on their usage. They also measure activity performance, cost objects and provide accurate cost information for managerial decisions. Their concomitantly complexities in part of installation are overweighed by the intense contribution to an organization, that subsequently involves centering the managing activities to improve the value achieved by the customers and serially helps the organization to timely realize their forecast. Evaluation of ABC/M Costing ABC/M is costing is a significant tool to organizations ABC/M is a vital business process improvement (BPI) tool that provides links to other essentials BPI schemes such as performance management and flow analysis[Pla95]. ABC/M together with BPI has focal point efforts on opportunities that enhance evaluation of effectiveness and improvement initiatives. Merits achieved through the linkage between BPI and ABC/M aids in: a. ABC/M provides the baseline quantitative data that enables managers to critically assess the achievement of process improvement schemes in terms of financial benefits and operational impact. b. ABC/M aids in identifying activities that are resource consuming and relatively to their strategic significance customer. Also it supports the tactical provision of information required for forecasted activities. c. ABC identifies the fact that most company processes functionally transcend the planed range of cost in serving the same clients and renders the same products and services. Thus, ABC endorses a team-oriented approach in management of cost with the organization and the customers[Pla95]. d. The information provided by ABM is fundamental as a base for making decisions within the business and outside outsourced business operations. Also it used in deciding which products, services and customers favors the goals of the organization basing on their net contribution to the business. e. With the current technology organizations are expected to efficiently and effectively perform its duties. ABC/M identifies occasion of activity redundancies and illuminate the subject areas for the benefit of the business oriented goals. f. ABC/M enables business to identify a base of forecast of financial requirements of new business initiatives g. ABC/M provides organization the essential information on activities and cost required to meet the objectives external initiatives Difference between Activity Based Costing and Activity Based Management; i. ABC costing reflects on understanding costs and their cost drivers while ABM seeks to change the cost involved in meeting the organizational activities. ii. ABC costing provides information on the performances of the products and market strategies as the ABM costing implements the better initiatives the performances. iii. ABC costing is primarily historical and reflects on controlling installed cost system while ABM costing technique foresees on limiting unnecessary costs that can be incurred as it maximizes the use of existing cost. iv. ABC is the result of a fixed analysis of the organization while ABM is entrenched in the dynamics of changes of the business. ABC/M Costing Decisive Analysis. Activity Based Management costing includes analysis of cost driver, activity analysis, and measures the performance[Rob92].ABC costing is preferably used to as a respond of the value of things while ABM costing stipulates a preview to understand the cause’s costs occurrences. Basing ABC costing data, ABM costing improves decision making by determining the products, services and customers to utilize the overheads[Mic99], it also identifies the opportunities that add no value (NVA) activities thus improving the activities of the business. Activity Based Management only complements the ABC costing by using as a basis to note the inefficiencies and invaluable activities, thus allowing most preferable opportunities to take place and thus maximizes profits of the business by limiting the cost required to be inputted. ABC/M costing is a system that covers of two components: Activity-Based Costing (ABC) and Activity-Based Management (ABM). ABC costing is categorically not a financial accounting system, but it’s a technique that provides a more reliable way in viewing and interpreting information’s by critically measuring the performances and cost of business processes and also their outputs. ABM is basically use to provide ABC information to procedurally assist the organizations in achieving their budgeted goals in more efficient and effective way. Activity Based Cost Management Framework What things cost Cost assignment (ABC/M) Resources Resource Driver Assignment Cost Drivers Activities Managing and Measuring Processes Activity Driver Assignment Cost Objects (Outputs) Better decision Reason for Making Cost of things Figure 1 Figure 1, gives an demonstration on how ABC/M traces costs from an company’s ledger chart to the activity they perform, and then to the cost objects they are engage in (i.e products, services, and customers). Resource drivers establish the level trough which a resource is consumed by every activity in the organization, while the activity driver determines how cost objects (products, services, and customers) consumes the same activity costs[Mic99]. Resource drivers are the time percentage taken by each employee to accomplish a certain activities, while the activity drivers refers to the number of services rendered, products produced and the number of customers served. The cost assignments view transforms the expenses of resources (salaries or supplies) in to the cost of work activities and ultimately in to the final cost objects The process view timely gives a series of work activities and accumulates the assemble activity costs throughout the business process. Cost Drivers are often determined by a surveying manager’s, workers or the subject matter expertise in the organization[Jud98]. A lively and open contribution from the company employee’s managers and experts in such surveys is decisively produces ABC information that accurately reflects organizational consumption of its resources at both cost object and the activity levels. I deal research on ABC/M Costing The extensive research shows that Traditional cost accounting method uses a similar technique with ABC/M costing to allocate and ascertain cost to their cost drivers and furthermore to the cost pools[Rob92], Traditional cost accounting, however differs from ABC/M costing as ABC/M operates on the basis that activity cost are incurred through the utilization of resources[Moh00], for example incase a consumer demand for products and services they trigger performance of activities in serving their needs. Traditional accounting systems were primarily designed to satisfy the requirements of external reporting. They rarely provide timely and significant information to business managers and staff.  As such they fall short to give necessary information for the managers realize the dynamic cost uniqueness of their business. Activity Based costing and Activity based management is develop and implemented to overwhelm the limitations of Traditional based costing. Budget deficits and directives such as the President’s Management Agenda (PMA) have exerts allot of pressure on business agencies. ABC/M costing identifies major understanding and controls of the costs while improving their performances[Jud98]. Unlike traditional costing technique many business organizations has always found uneasiness provision of a clear picture of the information systems needed to support strategic managerial decisions[Mic99], operational improvements. ABC/M costing can also reengineer efforts business information for the need needs to stay productive and competitive in the market. Activity-Based Cost Management (ABC/M) can coordinates with various departmental initiatives, is used to resolves business financial and operational information goals which might not be reflected in traditional costing. Hence with ABC/M, operational and the chief managers no longer call for accounting experts to effectively understand and manage costs. ABC/M provides better imminent into exact operational costs and illuminates alternatives to improve ways of managing business, rather than non illuminated statement costs with no justification on their use and contributions to the business[And07].ABC/M further assign resource types to work activities so they can be traced throughout the process The shortcomings of traditional cost accounting method evaluated by ABC and ABM costing: a. Arbitrary traditional costing lead to inaccurate make/buy decisions. The faulty forecast that cost injected will be limited when changing from make to buy This prediction can be inaccurate as total product cost actually to increases while the prediction from cost system decreases[Rob92]. Inaccuracy in traditional cost systems is as result of omission of overhead to acquire materials and assemblies which disfigures expected cost diminution analysis. b. The arbitrary application of the overheads, the largest component more than half of cost incurred reflects that there is limited knowledge of product cost. Although most business organizations use cost to compute the pricing required to meet proceeds marginal goals, there is petite information on factual product profitability[And07]. c. Traditional cost accounting system presents minor controls to the organizational managers on the effect of marketing, sales, and distribution and other product related cost or cost in product line profitability. Traditional cost systems can evidence a number of customers having the same profit margin when the facts are support cost incurred are dissimilar. d. The overhead resources used by different product and product lines is at a considerably different charge, hence a adjustments in product mix drastically changes the overhead cost incurred thus this is not reflected in the traditional cost method. Recommendations According to the intensive research on the ABC/M Costing, organizations should implement the use of the use of ABC/M Costing systems[Jud98]. Although some business firms see the unyielding picture on implementing the systems they should employ experts to execute the process of implementation. ABC/M costing posses intense controls to ensure that the organization realizes the utilization of cost incurred. ABC/M provides exact operational costs and illuminates alternatives to improve ways of the business is managed[And07]. Reference list Pla95: , (Player, 1995), Pla95: , (Player, 1995), Rob92: , (Coope, 1992), Mic99: , (Michael Gering, 1999), Jud98: , (Baker, 1998), Moh00: , (Mohan Nair, 2000), And07: , (Leitner, 2007), Read More