Activity-based costing (ABC) in management accounting

Management Accounting for Non-Accountants
5/13/2019

Accounting 1
Activity-based costing (ABC)
Management accounting is the provision that is linked to the financial data as well as the
advice to the company for utilizing the tools of accounting that majorly include Activity based
costing, budgeting and many others. The paper is prepared with the purpose of evaluating the
concept of Activity based costing (ABC). The review of different researcher has been taken for
evaluating the concept of Activity based costing (ABC). The increase in the competition does not
allow the company to conduct activities without this method of management accounting.
Activity-based costing deliver exact prediction of costs, it has been argued that it is surprising
that it is not more widely used. ABC method is used across different and varying industry and
organisation types and sizes (Shields, 2015). The factors that might prevent its widespread use
have been discussed with the support of the real business example.
According to Dale and Plunkett, 2017, activity based costing method is considered as
managerial accounting method that helps the companies to trace the overhead expenses to the
activities and later on allocating cost to the objects. ABC offers the alternative to the traditional
methods by assigning the overhead expenses based on the actions that might lead to overhead
expenditures. This method is considered as effective method in automated and diverse product
environment. Moreover, the ABC costing system is used by company in targeting costing,
product costing, customer profitability analysing, and many others. It is hugely popular in the
organisation as it contributes in forming a better or effective corporate focus and strategy
because of proper cost allocation (Accounting learning, 2018).
In addition Drury, 2013 shared the view, Activity based costing is established by Kaplan
and Cooper in Harvard business school with motive to analyse the cost of product. The cost of

Accounting 2
the product is majorly divided as the long-term variable as well as short-term variable costs. The
method of costing major focuses on identifying the activities as well as the processes of the
production that contributes effectively in processing a job.
Considering the view of Noreen, Brewer, and Garrison, 2011, the companies are applying
it because they are able to avail the benefit of accurate product cost. ABC system of costing leads
to the accurate as well as the reliability in identifying the cost that emphasis on the relationship
of cause and effective majorly in cost incurrence. This has been found ABC benefit in offering
the elimination of the indirect cost from the operations of the company. On the other hand,
disagreeing to this research of Woodruff, 2018 says that activity based costing is applied by the
company so that they can easily understand the information about the cost behaviour. This
costing helps the company in determining the events that do not add worth to the products. Thus,
this is the reason due to which the managers can control the different activities in business.
ABC method is majorly used by organisation that falls under the manufacturing of the
products in order to improve the cost incurred in manufacturing of the product. The research of
Mahal, and Hossain, 2015 proves the same with the real life company that is Nestle who is
applying the activity based costing method in Bangladesh. This has been found in the research
that the implementation of ABC method helps corporation to reduce the cost. Contradicting this,
research of Aldogan, Austill, and Kocakülâh, 2014, shows that health care centers are also,
applying the activity based costing method. The turkey health care centre has effectively
implemented the system to avail benefits in cost reduction without any compromise in terms of
the quality of the services that are provided by them to their patients or customers. This will also
help the health care centre to provide the services to the customers at the affordable prices. Thus,