Cost Accounting Approaches - Essay Example

TOC assumes most of the costs are fixed and that managers control them because they believe fixed costs should not increase, and that the only thing that is variable are the materials. In general, ABC is most effective over the long run as opposed to TOC producing short-term solutions. Figure 1 - As noted, ABC focuses on “cost” of resources and activities of products. COST ACCOUNTING APPROACH 2 ABC eliminates complexity by “reducing costs and focuses on higher-volume products using fewer resources for each unit produced.

” (Lockhart, Taylor, p. 4). It prioritizes production by tracing the cost of activities. TOC, on the other hand, removes complexity in the allocation process instead of the product. Managers realize the external and internal constraints in the system that limits profit. According to Lockhart, Taylor (2007), “To gain profit, TOC focuses on limited resources and recognizes that unit-cost and unit-profit are not sufficient to determine which products should be produced.” Consequently, TOC prioritizes production based on throughput, which is sales less variable cost, over constrained resources.

(Lockhart, Taylor, p. 6). . in conditions are met such as products using shared resources and that the demand is greater than the capacity of at least one resource, there is commitment to COST ACCOUNTING APPROACH 3 maintain the capacity, desire to maximize profits, market dictates price, and damage caused by products is of concern to the company. (p. 7). The utilization of cost accounting in other countries has both negative and positive results. In China, the implementation of ABC system failed at the Bank of China.

According to Abdallah, Li (2008), this was due to the following factors: the lack of clear business purpose, a lack of education about ABC, poor model design, a lack of participants, individual and organizational resistance to change, and the fact that few outsourcers were available. (p. 1). To prevent these problems and from making it worse, Chinese banks needed to use more effective methods of management and technologies that will improve their competitive advantage (Abdallah, Li, p.2). Few companies have explored this new system in East Asia especially financial institutions despite the fact that ABC system is highly valued.

As it turns out, ABC is costly and time-consuming compared to the traditional cost system which is easier and less expensive to implement. However, ABC in practice became more popular regardless of cost. In the 1980’s, the overhead costs of manufacturing increased. As a result, the management of traditional cost system has become less efficient. Also, as information technology developed, it provided opportunity for ABC which requires complex data recording processes. And, the accounting standards in United Kingdom and United States used more complex financial reporting which forced companies to use a more complex but accurate method of calculating overhead.