Report on Various Costing Techniques of ABC
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Added on 2020-05-16
Report on Various Costing Techniques of ABC
Added on 2020-05-16
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Running head: BUSINESS FINANCEBusiness FinanceName of the StudentName of the UniversityAuthor’s Note
1BUSINESS FINANCETable of ContentsIntroduction......................................................................................................................................2Emergence of ABC..........................................................................................................................2Features of ABC and Traditional Costing System..........................................................................3ABC.............................................................................................................................................3Traditional Costing System.........................................................................................................4Implementation of Activity Based Costing.....................................................................................4Evaluation of ABC..........................................................................................................................6Activity Based Management............................................................................................................7Emergence...................................................................................................................................7Usefulness....................................................................................................................................7Conclusion.......................................................................................................................................8References........................................................................................................................................9
2BUSINESS FINANCEIntroductionIn today’s business world, Cost Accounting plays an integral part for the businessorganizations in controlling various costs of the businesses. Cost accounting refers to the processof recording, classifying, analyzing, summarizing, allocating and evaluating different alternativecourses of action so that the costs of the companies can be controlled (Drury 2013). In the costaccounting process of the business organizations, the use of two major techniques can be seen;they are Activity Based Costing (ABC) and Traditional Costing System. The popularity of thesetwo costing techniques can be seen all over the world as the companies become majorlybeneficial from the use of these costing approaches. However, in the recent years, it can be seenthat the business organizations have a fondness towards the implementation of ABC in theirbusiness operations due to the superiority of ABC over traditional costing approach in manyareas (Vanderbeck 2012). The main aim of this report is to conduct an analysis and evaluation ofthe various techniques of ABC in the business organizations.Emergence of ABCABC is considered as the latest development in the system of cost accounting. Under theprocess of ABC, the cost accountants absorb the overheads on a more realistic manner than theequitable basis. In today’s business world, due to the technological advancements, themanufacturing firms are forced to use advanced technology in the manufacturing process. In thiskind of situation, increase in overhead can be seen along with the decrease in direct costs; moreimportantly, decrease in direct labor cost can be seen. Now-a-days, it can be seen that singlecompanies are manufacturing large number of products. The automatic system in productionincreases the amount of overheads (Emblemsvåg and Bras 2012). Thus, under this highly
3BUSINESS FINANCEcompetition market, it is required for the companies to implement correct costing of products sothat misleading decision-making process can be avoided. Some expenses like cost of materialhandling and machine set up are only incurred at the time of the production process (Hilton andPlatt 2013). The adding of these costs is done with volume rated costs like purchase expensesand manufacturing expenses. This is not the correct method for of cost accounting. Under thetechniques of ABC, the calculation of these expenses is done separately and they are appointedin the end products in order to get the correct product cost. For this reason, ABC has the potentialto provide more useful information to the cost accountants for various costing porpoises. Thus,ABC put more focus on a cost activity rather than on the departments, sections or divisions.Various value adding activities or non-value adding activities can be seen in the departments,sections and divisions (Frazier 2014). With the help of ABC, the cost accountants become able toeliminate non-value added activities for the proper allocation of product costs. Features of ABC and Traditional Costing SystemThe features of ABC and Traditional Costing System are discussed below:ABCUnder the process of ABC, the total costs are divided into two types; they are Fixed Costsand Variable Costs. This segregation of costs is needed for providing quality informationfor the designing of suitable cost system in the manufacturing companies (Schulze,Seuring and Ewering 2012).With the help of ABC, cost accountants become able to make proper distinction amongvarious patterns of cost patterns.
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