During the late 1980s and throughout the decade of the 1990s, a comprehensive debate took place in the academic literature concerning the relevance and effectiveness of Activity-Based Costing (ABC) as a managerial accounting platform. Proponents of ABC contended that it…
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their was no empirical evidence to indicate that ABC eliminated unnecessary overhead costs and improved the profitability of companies post-implementation (Shim & Stagliano, 1997; Foster & Swenson, 1997; Chenhall & Langfield-Smith, 1998).
During the last century, accurately accounting for overhead costs posed a major challenge for management accountants. Conventional allocation methods tended to distort product costs and Activity-Based Costing emerged as a realistic alternative to address this problem. This paper provides a brief overview of the origins of ABC and explores the theoretical foundation of ABC as a management and cost control system. The paper then discusses the major strengths and limitations of the ABC model and provides a practical example of how ABC has been fully integrated into the strategic management systems of a successful manufacturing company in Qatar.
Activity-based Costing has gone through three distinct phases in its development. Each phase has its origins in one of the following theoretical constructs; the Japanese management movement, the total quality management and continuous improvement framework and Six Sigma modelling. The application of these theoretical models to the development of ABC is discussed below.
Activity-Based Costing began to draw the attention of European and American companies in the early 1980s. Firms in the manufacturing and technology sectors in Japan were gaining global pre-eminence with respect to their product quality and significant profit margins while competitors in the West struggled to contain costs and to develop innovative manufacturing processes. Turney (2005), notes that companies such as Toyota and Sony were heralded as global leaders and as a result, their internal organizational processes were analyzed in minute detail and replicated by their competitors in the West.
It soon became apparent that the traditional accounting methodology of allocating overhead costs uniformly across the various
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Accounting and Finance for Managers Assignment Example | Topics and Well Written Essays - 2750 Words. https://studentshare.org/miscellaneous/1569850-accounting-and-finance-for-managers.
“Accounting and Finance for Managers Assignment Example | Topics and Well Written Essays - 2750 Words”, n.d. https://studentshare.org/miscellaneous/1569850-accounting-and-finance-for-managers.
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