Activity Based Costing: Significance and Contribution to Financial Performance

The paper analyzes the significance of Activity Based Costing (ABC) and how it contributes to the financial performance of the organization. ABC is an accounting process that recognizes and allocates expenditures to overhead activities and then apportions those overheads to products. It helps in bringing accuracy and consistency in product price determination by concentrating on cause and effect connection in the cost incurrence. It helps in identifying that it is the events which cause expenditures, not commodities and it is the product which consumes actions.

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Finance and Accounting

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Introduction
Financial accounting is the procedure of summarizing, recording and broadcasting the numerous
of transactions resulting from business processes over a period of time (Weil, Schipper &
Francis, 2013). On the other hand, cost accounting is an accounting process which plans to
capture a cost of production of the company by evaluating the inputexpenditures of each step of
construction as well as fixed costs like devaluation of capital equipment (Drury, 2013). In
addition, cost accounting will first evaluate and thereby record these costs specifically and then
equate input outcomes to output or actual consequences to support company management in
determining financial performance. The aim of the paper is to analyze the activity based costing,
its significance and how it contributing to the financial performance of the organization.
Analysis
Activity Based Costing (ABC)
ABC is an accounting process, which recognizes and allocates expenditures to overhead
activities and then apportions those overheads to products. In addition, it is such a system which
identifies the connection between costs, overhead activities and industrial products and through
this connection, it allocates indirect costs to products less subjectively than traditional
approaches (Kinney, Raiborn & Poznanski, 2011). It is basically used in the manufacturing
industry since it increases the consistency of cost information and hence generatingclosely true
costs and better categorizing the costs acquired by the business during its production procedure.
Furthermore, the ABC has grown in significance in present decades because the business
overhead expenses have increased considerably and the manufacturing overhead expenses no
longer associate with the dynamic machine hours or direct employment hours.
Significance of ABC
Activity based costing plays an important role in modern day organizations. It helps in bringing
accurateness and consistency in product price determination by concentrating in cause and effect
connection in the cost incurrence. It helps in identifying that it is the events which cause
expenditures, not commodities and it is the product which consume actions. It thereby also helps
an organization in producing consistent and precise product cost information in case of superior
diversity amongst the products manufactured such as high capacity and low capacity products.

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Furthermore, with the help of ABC, it helps in recognizing the physical nature of budget
behavior and thereby facilitates in decreasing costs and recognizing activities which do not add
importance to the product. In addition, the statement of overheads is being prepared on activity
wise and thereby equates the costs of each movement with one another for finding the advocates
which are to be eradicated or enhanced for better financial performance (Schmidt & Nakajima,
2013). However, due to substantial competition, every organization is looking out for
restructuring their cost structure and manufacture products that ensemble their business and
organizational arrangement (Zimmerman & Yahya-Zadeh, 2011). In addition, ABC dashes costs
to regions of managerial responsibility, procedures, consumers, sectors besides the product costs.
Conclusion
Activity based costing helps an organization to improve the decision making of the mangers
greatly and provide accurate and correct data to its managers. It has been observed that ABC
costs offers more realistic product costs in comparison to its other costs structures. ABC has
grown in importance in current decades because the business overhead expenditures have
increased substantially. It has also been observed that this cost system uses numerous cost
drivers, many of which are business based rather than product capacity. Thus, it can also be
concluded that it can offer better costing data and thereby help management manage effectively
and gain a better understanding of the competitive benefit of the firm.

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Reference List
Drury, C.M., (2013). Management and cost accounting. Berlin: Springer.
Kinney, M.R., Raiborn, C.A. &Poznanski, P.J., (2011). Cost accounting: Foundations and
evolutions. Issues in Accounting Education, 26(1), pp.257-258.
Schmidt, M., & Nakajima, M. (2013). Material flow cost accounting as an approach to improve
resource efficiency in manufacturing companies. Resources, 2(3), 358-369.
Weil, R. L., Schipper, K., & Francis, J. (2013). Financial accounting: an introduction to
concepts, methods and uses. Boston: Cengage Learning.
Zimmerman, J.L. &Yahya-Zadeh, M., (2011). Accounting for decision making and
control. Issues in Accounting Education, 26(1), pp.258-259.