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The system is also accurate because it identifies products and then assigns to them direct and indirect costs. This means that ABC identifies the cost of producing various products. This then enables companies to determine the products that are highly profitable and those that produce low returns (Kaplan, & Anderson, 2005). Organizations then decide to produce the profitable products in large quantities and the less profitable ones in low or no quantities.
ABC system helps managers in forecasting demand for their products and predicting sales using the company’s capacity. The capacity of an organization refers to the ability of employees and machines to produce goods of a certain quantity. Organizations compare the products that employees and machines produce in a day and those that consumers purchase on the same period. If the company sells all the products that it produces, it discovers that its demand is higher than its capacity (Drury, 2012). If consumption is less than production, companies, are able to tell that the level of demand is below its capacity. Organizations then determine the amount of output to produce using the comparisons.
ABC system is vital in identifying wasteful products and ensuring resources are used productively. According to Kaplan and Anderson (2005), activity-based costing system allows managers to eliminate costs spent on non-value adding activities. This provides greater visibility into business processes and operational cost drivers. Improving information visibility also enables cost managers to deploy quality-related initiatives by identifying and eliminating poor quality activities together and their cost drivers (Gilbert, 2007). This is beneficial to the company as it increases efficiency and profitability because firms concentrate on profitable activities and products.
Setting an activity-based system is costly and time-consuming. Extra costs are caused by the need to hire the services of a consultant with
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The main objective of this type of system is proper identification of all cost categories and using basing decisions on this information. Most organizations that use ABC systems have two costing systems – the official costing system that is used for preparing external financial reports
Based on the activity based costing (ABC) method, the company should increase the number of department stores, as part of its expansion strategy (Chakraborty, 2004). This is because, unlike the direct simple costing method, the activity based costing (ABC) has a higher level of accuracy.
Activity Based Costing (ABC) is a common procedure normally most of the organizations adopted to determine the price of their products or services. Both indirect and direct costs of manufacturing will be considered while calculating the unit price. This method proved to be an effective way to determine the true cost of a product or service.
Accountants have always paid close attention to costs, since this variable provides a basis that is utilized throughout the entire accounting information system. In a manufacturing firm labor and materials have always been cost
In the case study presented, the activities for the division include manufacturing of the products using similar, expensive and complex molding machines, with each machine producing three product lines.
Conversely, the traditional method of costing allocates cost at an average rate to all product-based products. The traditional method brings together any price that are indirect in the production and equally implements the costs across the board through employing one applicable cost driver, for instance, the machine hours.
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