Mangement accountting - Essay Example

In most cases and in some cost centers, Direct Labor varies directly but not proportionately with outputs. In the most modern manufacturing systems flexible manufacturing systems perform one production process from start to finish. The standard cost of machining a part in a manufacturing company’s facilities has always been expressed in Labour Hours. The labor hour that is expended in machining a part brings out the facility’s share in that company. As most companies use flexible manufacturing systems, almost all labor hours are part of the burden and hence it cannot be attributed to the manufacturing of a particular part.

Activity based costing (ABA) is a method of measuring, analyzing, recording, controlling and reporting on the costs and performance of activities. It appeared as promising decision support measure and it focused on performance of activities rather than emphasizing on the costs, departments and cost centers. Generally, the activity-based costing encourages continuous improvement rather than just making reports on the past operations. ABC creates more complicated costing system because, the use of absorption costing needs biased selection of absorption criteria and cost volume assumptions and hence when the manufacturing volume varies, activity based system would not be able to predict profits.

There fore, it has been criticized that it is not so adequate for decision making process. When a firm has internal limitation because its productivity is lesser than the demand for its products, activity based system does not consider these limitations and abilities and thus it determines maximum product mix. Activity based costing use information from the existing general ledger systems and thus when for instance monthly statements are prepared another process is required to allocate costs to the concerned activities.

Despite the weaknesses of activity based costing, many leading firms including IBM, Hewlett-Packard, and British Airways etc