BX3172: Activity-Based Costing and its Application in Practice

This essay provides an analysis of activity-based costing (ABC), examining its application in various organizational settings and the factors that influence its usage. It reflects on the connection between the theory and practice of ABC, particularly focusing on understanding the technique and the reasons for its limited widespread adoption. The discussion covers the advantages and disadvantages of the ABC approach, including its potential to enhance cost accuracy and its challenges related to implementation costs and complexity. The essay also considers the applicability of ABC across different organizational sizes and industries, concluding with a perspective on the overall value and sustainability of the ABC approach in modern management accounting. It suggests that for ABC to regain popularity, it needs to be reframed with a general approach and less complex calculations.

MANAGEMENT FOR NON ACCOUNTANTS

Introduction
The idea of business and creating and organising and organisation is an act which includes
number of actions and considerations and the section of each of its elements has to be
interlinked and connected so that the desired output could be achieved. The management of
an organisation includes both the financial and the non-financial management which though
carry completely different perspectives but the connection and the impact of each of the
management could be felt by the other (Mahal & Hossain, 2015). This brings in the accuracy
and the sensitivity that is to be maintained while setting up an organisation. Management
decisions concerning the non-financial ones are actually based on the financial management
and vice a versa. This could be explained through exploration of one of the most popular yet
not practiced widely theory or concept of Costing and that is Activity based costing (ABC).
This brings in another vital aspect of the organisation management and that is costs. Cost is
the most vital and the most impacted ingredient of the organisation through any petty change
in the workings or the decision of the organisation (Vermaak & Botha, 2015). There are
multiple models and theories which helps in controlling cost and this has been practiced by
many organisations. The ABC model is one of such model which would be explored in the
writing through stating the experience I have gained on acknowledging the concerned model.
The reason for the unpopularity of ABC model and the non-usage of the model would be
stated in contrast to the benefits the model serves. This would help in understanding the
actual position of the ABC model and the knowledge I have gained through the exploration
would help me in doing so.
Discussion
On understanding the concept of ABC model and the technique applied for the analysis of
costing through it, it has been realized that the model work through bringing on a connection
and linkage among all the activities or actions concerning the product and the cost of it is
distributed to the entire product. This has been stated by Kampf et al. (2016), that the ABC is
one of the methods which works through identifying activities in an organisation through
assigning costs of every single activity to each and every product of the organisation and
services which is based on the actual consumption of the each of the products. The
approach has also been defined by the Chartered Institute of Management Accounts (CIMA),
as an approach to costing and monitor of activities which is done through tracing the
consumption of the resources along with the costing of the final outputs. This has helped me

in gaining the accurate and the literal meaning of the term and this has been quite fruitful for
understanding the factors that played a vital role in the unpopularity of the model. As per Liu
et al. (2016), ABC approach has been one of the approaches which helped many
multinational as well as national companies in gaining the profit ratio and accelerating
towards success through understanding the costs of their companies closely and thus, the
measures and the steps to control or mitigate its impact were taken immediately. I agree to
this fact but, I also carry a perspective that though the activity based costing helped in
distribution of the cost over the entire company an d acknowledge which are the productive
and on productive products, still the approach carried number of disadvantages or side effects
which led to the downfall of the approach use or application. In the words of Aithal et al.
(2016), the application and the use of ABC approach has been observed to add on to the
costing of the company as it created multiple cost pools whose management and
identification required additional efforts and thus, the company had to bear more cost than it
saved through its application. Even I have realized the same concept of the approach, and I
believe that the concerned approach adds on to the costs of the company through creating
multiple cost drivers and thus, no additional benefit is derived from its application. The other
loophole which I have identified in the ABC approach is that the approach is much more
applicable to the multinational and large sized organisations rather than to the start-ups or
small sized organisations which has been supported by the views of Mersy et al. (2015). The
author has rightly stated that the measurements that is required for the application of the
approach proves to be the main obstacles or limitations for its application. The basic and the
initial ABC calculations demands multiple calculations and that too through number of
assumptions and considerations which are not feasible for the small companies or
organisations to take up. This would result to the additional cost of the company which the
small sized companies cannot afford.
According to Karpov (2015), ABC approach has been one of the approaches which is most
accurate n tracing the overhead costs which generally gets left out by the other costing
systems or approach. The idea has been accepted by other authors too and even I have gained
this knowledge through the regressive access of the information and facts on the concerned
approach. The tracing of the overhead costs are important for the company though the cost
amounts are small in number but when viewed as a whole it sums up to a huge number which
if ignored then impacts the accounts of the company immensely. The loopholes that the
approach has been carrying and the side effects on the company has been the main reason for

the unpopularity of the ABC approach which has also been justified through many of the
authors. As per Nallusamy et al. (2017), the costing is one of the ingredients of the company
or accounting which needs to be maintained and checked on a regular basis through effective
and accurate approaches and concept so that the accuracy and the sensitivity of the ingredient
could be maintained.
Through exploring the various facts about the ABC approach I have realized that the
approach has been taken up by many of the multinational companies especially the medicine
and health companies where the costs are higher and thus, the calculations has been quite
effective. But in this industry the overhead costs are also huge number whose calculations
were regressive and it added on to the cost of the companies which was later reduced through
the rejection of practice of the approach. The size of the organisation plays a vital role in the
selection of the costing approach which has been acknowledged I the exploration. The ABC
approach has been generally utilised by the multinational and large companies which could
afford high costs but the small and medium sized enterprises do not have the capability or the
affordability to take up the concerned approach which is the biggest and the most crucial
disadvantage of the approach. This brings in the fact that the approach should have been
framed in a manner that it would have been applied and taken up by all kinds and types of
organisations which would have added on to its popularity and feasibility of use. This has
been agreed upon by Konishcheva et al. (2018), who clearly states that the accounting or the
cost calculations of the company needs to be framed in a manner which should carry a
general approach and no specific approach. Being specific would reduce its feasibility and
applicability and thus, its sustainability would be under attack.
Conclusion
The entire exploration of the ABC approach has been quite knowledgeable for me and the
information’s which has been gathered helped in knowing the reasons for the unpopularity of
the concerned approach. I completely agree with the fact that the approach carries number of
factors which supports its non-popularity and being quitted by many companies. The general
approach should have been the idea of the approach which would have helped the approach
to be applied in any type of organisation and thus, the use and applicability of the
organisation would have sustained or increased with time. Thus, as per my views and
concepts that I have gained has been in favour of giving up the ABC approach and the factors
that has resulted in its failure are justified and accurate. The tracing of the overhead costs are

important for the company though the cost amounts are small in number but when viewed as
a whole it sums up to a huge number which if ignored then impacts the accounts of the
company immensely. This fact has been one of the major reasons for the failure of the
approach and it is suggested that in order to regain its popularity, the approach needs to be
reframed with a general approach and less complex calculations which could be the reason
for its popularity.

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