Evolution and Use of Activity Based Costing in Cost Reduction Measures

Managerial Accounting Assignment

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By student name
Professor
University
Date: 5th Sep, 2018.
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Contents
Background and Abstract............................................................................................................................3
Introduction.................................................................................................................................................3
Advantages of ABC costing technique.........................................................................................................3
Disadvantages of ABC costing technique.....................................................................................................4
Discussion on the two journals....................................................................................................................5
Analysis and Explanation of the Journal articles..........................................................................................5
Purpose of the studies and the research questions.................................................................................5
Similarities and differences between the findings of the 2 studies.........................................................7
Specific outcomes and relevant learnings from the researches..............................................................8
References.................................................................................................................................................10
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Background and Abstract
A report has been prepared on the evolution and the use of the activity based costing over the
past few years and how the same has helped the organization, whether small or big, products or
services in cutting down the costs and evaluating the right channel and method of allocation of
costs among the different activities in the value chain. For the purpose of discussion and
analysis, two research articles have been selected and the same has been analysed for similarities,
the differences and the methodology of the study. The report highlights the advantages as well as
the disadvantages of the activity based costing and how the shortcomings can be resolved over
time. It has a major role to play in cost reduction measures and helping the companies in
competitive pricing as the market is perfectly competitive and there is huge price pressure
(Calvasina & Calvasina, 2017). At the end, conclusion and recommendation has been given as to
whether activity based costing is necessary for business environment or not.
Introduction
Activity based costing is a costing model and technique which helps in the allocation of the
indirect costs in the companies and industries to different processes. The allocation of direct
costs and expenses is relatively easy as the same is directly allocated in the ratio of sales made by
company. However, it is just the indirect costs which poses a problem and hence a suitable cost
driver needs to be defined based on which allocation can be done. As per the activity based
costing methodology, the total cost pool is allocated to the different activities, which is further
allocated to given cost centres based on the nature and finally the costs are then distributed based
on the cost drivers. Cost drivers are nothing but the allocation base which helps in dividing the
cost. It gives per unit cost for each given activity (Boccia & Leonardi, 2016). As per ABC logic
relationship must be established between the activity and the costs. Like, rent is allocated to
different activities based on the space occupied, electricity is allocated to different activities
based on the machine hours being used. Cost can generally be divided in 3 categories namely the
fixed costs, the variable costs and the semi variable costs. ABC costing thus helps in allocating
various types of costs effectively and efficiently and thus utilization of limited resources in the
best possible manner.
Advantages of ABC costing technique
There are various advantages of Activity Based Costing, some of which are mentioned below:
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