Abstract This paper provides a basic introduction to ABC (ActivityBased Costing) methods as a managerial accounting technique, a comparison to traditional based methods, benefits and disadvantages of ABC. The paper also includes an analysis of ABC methods as a TQM (Total Quality Management) component and provides a summary analysis of the system.
Table of Contents
Abstract
Introduction to ActivityBasedAccounting Uses for ABC
Implementing ABC
Advantages of ABC Costing
Disadvantages of ABC Costing
ABC versus Traditional Accounting The Concerns of ActivityBased Management
Summary Analysis
References
From the Paper "Activity-Based Costing (ABC) arose in the 1980s from the increasing lack of relevance of traditional cost accounting methods. The traditional cost accounting methods were designed around 1870 - 1920 and in those days industry was labor intensive, there was no automation, the product variety was small and the overhead costs in companies were generally very low compared to today. However, from the 1960s - particularly 1980s - this changed rapidly. Activity Based Costing is based on a simple principle: activities consume resources and customers consume activities. Associating the labor and overhead expenses of the business with the activities that consume those resources provides valuable facts. ABC defines categories of activity in overhead departments, which on the one hand are recognizable to overhead department managers but, on the other hand, are driven by factors (cost drivers) which are characteristic of products and other cost objects. This allows a much higher proportion of total company cost to be allocated to products according to causation. Ultimately, ABC provides accounting data points that can be used to improve decision-making and identify cost improvement opportunities. The basic building blocks for ABC are activity accounting spreadsheets for each element of a business. The workload of each activity is measured resulting in a cost per output. "
Tags: comparison, flaws, component, cost, data, labor, y
Abstract This paper examines activitybased costing (ABC) which is an effective business management tool that will enhance and support a total quality management (TQM) environment. ABC analysis provides the information necessary to make business decisions such as determining if investments in efficiency initiatives, such as just in time (JIT), are warranted. When implementing ABC, management should use proven project management methodology to minimize the risk of failure. ABC is an effective total quality management tool, and supports just-in-time manufacturing methods in several companies as detailed in the paper.
From the Paper "After developing ABC in the 1980?s, Robin Cooper and Robert S. Kaplan have written extensively about its benefits (Shih-Jen & Holinda, p. 46). ABC is defined as a "costing system that identifies the various activities performed in a firm and uses multiple cost drivers"to assign overhead (or indirect costs) to products? (Siegel and Shim 2000, p. 15). ABC seeks to accumulate and allocate factory overhead costs to products (or services) by using focused drivers, such as, quality inspecting, moving, assembly, and matching (Warren, 2002, p. 328). Proponents of ABC cite many examples where cost accuracy is superior to traditional costing methods that use cost bases such as units produced, labor, or machine hours used (Warren, p. 421). "
Abstract This paper discusses ActivityBased Costing (ABC) in relation to its various components as well as in relation to an actual organization. The paper discusses how Pilgrims Manufacturing Inc. is a manufacturer of industrial coils that operates two factories. The paper portrays how ABC is particularly useful for Pilgrims because one of its factories is antiquated, still relying on manual labor for the majority of its productivity and the other is highly automated.
From the Paper "Activity Based Costing (ABC) is an accounting method that allows an organization to determine actual costs associated with each product and/or service produced by the organization without regard to the organizational structure or other extraneous function. ABC is a powerful tool for measuring performance, identifying, describing and assigning costs to, and reporting on an organization's operations (Caplan, Melumad & Ziv, 2005). Used holistically, ABC can be utilized to also improve processes and identify opportunities to improve business effectiveness and efficiency by determining the true or real costs of a given product or service. ABC principles are used to focus management's attention on the total cost to produce a product or service, and as a basis for full cost recovery of a production or service process. Support and production oriented organizations are particularly suitable for ABC activity because they produce identifiable and measurable units of output."
An review of "ActivityBased Management for Service Industries, Government Entities and Non-Profit Organizations" in which it describes activitybased systems (ABS).
675 words (approx. 2.7 pages), 1 source, 2006, $ 26.95
Abstract This paper presents the author's perspective in "ActivityBased Management for Service Industries, Government Entities and Non-Profit Organizations". The paper shows how the book focuses on providing information to managers that is vital to modern business concerned with cost management. Specifically, the book discusses activitybased systems (ABS) that examines company profits in relation to activities generated by the organization.
From the Paper "The Author's Perspective: Activity Based Management Activity Based Management for Service Industries, Government Entities and Non-Profit Organizations focuses on providing information to managers that is vital to modern business concerned with cost management. The book discusses Activity Based Systems (ABS) that examine company profits in relation to activities generated by the organization. This process blends into the concept of Activity Based Costing (ABC), which allows management to comprehend profits that are derived from products currently in the market. As these elements are focused upon, Activity Based Management (ABM) then proceeds to determine which factors contributing to the organization are effective, and where costs can be reduced through Activity Based Budgeting (ABB). Proper budgeting through this system allows managers to plan the finances of the organization in a manner that will align the company with the competition, and provide for a stronger economic future (Brimson & Antos)."
An overview of the methods of applying the "activity-based costing system" at Dakota Office Supply, in which actual costs associated with each product are established.
Abstract The paper discusses, in a detailed description, the effectiveness of an activity-based costing system or ABC and the ineffectiveness of the current costing system in use at the Dakota Office Supply (DOS) company . The paper then relates the methodology of implementing ABC at DOS and the procedures involved in its application.
Outline:
Overview
Situational analysis
Activitybased costing
ABC in practice at Dakota
Procedural steps of ABC
From the Paper "Before performing ABC, a baseline or a starting point is needed for business process improvement and a baseline can be expressed in some form of model. This baseline is critical for DOP because in order to establish this baseline metric the analytics just performed must be done for each individual account. If DOP performs this activity on each customer the strategic management benefits would be substantial because all the excess cost-drivers could be eliminated resulting in much wider operating margins and thus profitability without increasing costs or committing resources to gain this efficiency. Therefore, a baseline is a documentation of the organization's policies, practices, methods, measures, costs and their interrelationships at a particular location at a particular point in time (Maiga & Jacobs, 2003). Through base-lining, activity inputs and outputs across functional lines of business can be identified. ABC is the only improvement methodology that provides output or unit costs. Value added activities are those for which the customers are usually willing to pay in some fashion for the product or service. Non-value added are activities that create waste, result in a delay of some sort, and potentially adds costs to the products or services. Resources are assigned to activities so that the activities can be performed in the first place. Some of Pilgrims' resources are measured in man-hours, machine hours as well as machine maintenance and operational overhead. It is through ABC that an organization can begin to see actual dollar costs against individual activities, and find opportunities to streamline or reduce those costs, or even eliminate the entire activity thus removing the cost altogether. This is the process inherent in ABC that reduces overall expenditures of the company. "
Abstract This paper considers the relatively new costing model called activity-based costing, developed in the 1980s and then refined through use by various organizations since. This approach is designed to focus attention on the causes behind indirect costs. The ABC system is directed largely at the issue of allocation, placing an emphasis on activities rather than traditional organizational departments as a way of isolating the causes of costs, or the factors that are most likely to cause or contribute to the accumulation of costs.
From the Paper "Activity Based Costing (ABC) was developed in the 1980s and has been refined through use by various organizations since. This approach is designed to focus attention on the causes behind indirect costs. The ABC system is directed largely at the issue of allocation, placing an emphasis on activities rather than traditional organizational departments as a way of isolating the causes of costs, or the factors that are most likely to cause or contribute to the accumulation of costs (Lewis, 1993, 12). The elements of this system can be applied to the working of a given business to help identify what may be driving costs upward. ABC can also be described as "a costing model that identifies the cost pools, or activity centers, in an organization and assigns costs to products and services (cost drivers) based on the number of events or transactions involved in the process of providing a product or..."
Abstract The writer of this paper stresses that the purpose of any cost accounting system is to provide current information about the total cost of manufacturing a product or performing a service. This paper analyzes in detail the strengths and weaknesses of traditional cost accounting (TCA) and activitybase costing (ABC). TCA is a well developed method of estimating cost incurred while the ABC system is based on costs which are driven by factors other than product volume.
From the Paper "A problem may arise in the use of actual overhead costs. The problem stems from the fact that many of the elements of manufacturing are fixed costs, rather than variable costs. Fixed costs are those that tend to remain relatively constant from month to month. Examples of fixed overhead costs include the monthly salary paid to plant managers, depreciation, property taxes, and insurance on plant assets."
Abstract The paper explains that activity-based costing (ABC) allows accountants to obtain a more precise view of the costs associated with specific products or services. This paper uses a case analysis to explore how ABC can help to achieve greater cost effectiveness in the healthcare industry. The paper concludes that although ABC can play an important role in reducing healthcare costs, little can be done to reduce direct costs associated with a procedure without a sacrifice of patient safety.
Outline:
Introduction
Objective of the paper
Analysis, Findings & Discussion
Suggestions, Recommendations & Conclusions
From the Paper "Activity-Based Costing (ABC) allocates the costs of production to specific products or services. It is more precise than older methods of accounting that involved adding a broad percentage of expenditures to direct and indirect costs. The definitions of direct and indirect costs varied and were often a judgement call on the part of the accountant. ABC allowed accountants to obtain a more precise view of the costs associated with specific products or services."
Abstract This paper begins by explaining how activity-based management (ABM) works and the techniques used to implement this form of management. The paper also explains that the purpose of ABM is to improve business processes, provide strategic product cost data and promote continuous improvement efforts. The paper concludes that ABM is helpful in significantly improving the bottom line profits and returns of a company and that, while it may take some patience to put the ABM program into place, it is well worth the effort.
From the Paper "However, ABM is a management tool, not an accounting system. It is a tool for looking at how and why a company uses resources. ABM uses ABC, a method of calculating costs. The ABM view is that costs are incurred because of the company's activities, and these activities exist because they support either other activities or the company's products and services."
Abstract The paper discusses "activity-based costing" or ABC, and states that it is a modern performance measurement tool that assists in identifying, describing, and assigning costs to a company's operations. The paper highlights the principles and advantages of the system and mentions that the most suitable products for which the ABC method can be used are support services, given the units of output they produce. This concept can support managers in seeing how to maximize shareholder value and improve corporate performance.
Outline:
Introduction
ActivityBased Costing Methodology
ActivityBased Costing Implementation
ActivityBased Costing Advantages
ActivityBased Costing Disadvantages
Traditional Cost Accounting Comparison between ABC and traditional methods
From the Paper "In opposition, the ABC method is based on a different approach, which is called project-management approach. By following this approach, "ABC starts by determining the level of effort for a specific resource (person) to perform a given task (activity). This level of effort is typically calculated using an algorithm derived from experience and analysis of the cost and time drivers that affects each activity. After calculating the effort (in work hours), one can derive costs for that specific task by factoring in the hourly cost of the person who performs that task. The compilation of costs for all tasks in the project is the total project cost."
Tags: costing, accounting, cost, center, fixed, costs
Abstract ActivityBased Costing or (ABC), although not a completely new discipline within the accounting profession, is rapidly becoming one of the most popular avenues of study for business majors in the academic world. The paper shows that ABC is full of benefits, with few limiting factors and perhaps the fastest growing phase of accountancy in the world today. The spread of ABC into the European Union alone is creating fierce competition between U. S., British and German companies and foreign organizations for persons willing to go into the lucrative field.
This paper centers on ABC itself and does not go into comparative methodologies with older forms of Cost Accounting.
Paper Outline:
An Introduction to ABC
What is ABC and How Does it Work?
ABC: An Overview
Cost Drivers
ABC and the Dept. of Defense
ABC - The Navy Way
The Implementation Starting Point
Dept. of Defense - Final Recommendations for Implementation
Expanding the Concept - Another Success Story
16,000 Ideas for Change in 2 Months
Yet Another Success Story on a Grander Scale
Conclusions and Recommendations
Bibliography
From the Paper "Early in 1994, Texas Commerce Bank launched a reengineering effort, called "Process Improvement," which included every organizational process and all 9,000 employees. Not only was the level of involvement unique, the bank structured and implemented "Process Improvement," without outside consultants. There were several goals of the program including, removing all employee frustrations associated with cumbersome policies, processes, services, or products; streamlining processes to improve quality and delivering improved service to customers and eliminating unnecessary expense."
Abstract The paper explains the need for activities-basedaccounting even in small family owned businesses, specifically, a cost volume profit analysis. The paper analyzes the cost accounting of a small family owned pizza parlor. The paper provides data in tables and in a pie chart to evaluate budgets and sales costs, labor costs and competition.
Outline:
Introduction
Activities-Based Cost Accounting Cost Volume Profit Analysis
Direct Materials Budget Monthly Average
Direct Labor
Competition
From the Paper "Family owned small businesses are frequently left out of the loop when it comes to managerial and accounting science as frequently the owner and or managers tend to believe that the limited level of operations is manageable via the use of traditional organizational means, or those employed historically. The result is frequently that the individual family business may be left unaware of the real situation with regard to cost accounting as well as overall broad health of the business at any given time. (Chua, Chrisman, and Sharma 19) Owners, and especially on site managers may and often are seriously over committed to day to day running of a business and may feel that added tools mean added tasks and responsibilities, and yet once they implement the use of certain cost accounting tools they may actually find that the time it takes to manage costs is actually cut down, as they are aware of the overall health of the business and the cost/profit per unit sold. (De Kok, Uhlaner, and Thurik 441)"
Abstract Cost accounting is the process of tracking, recording and analyzing costs associated with the activity of an organization, where cost is defined as required time or resources. Activity-based costing (ABC) is a method of allocating costs to products and services. This paper examines how the major objective of the ABC process is to objectively determine a better way of doing business. It provides examples of cost analysis and concludes that the analysis of these costs and models serves to provide the basis from which decisions can be made and evaluated.
From the Paper "Costs can be categorized in three ways. Direct costs are those that can be traced directly to one output. For example, the material costs (varnish, wood, paint) to build a chair. Indirect costs are those that cannot be allocated to an individual output; in other words, they benefit two or more outputs, but not all outputs. An example would be maintenance costs for the saws that cut the wood, storage costs, other construction materials, and quality assurance. General & Administrative-costs cannot reasonably be associated with any particular product or service produced (overhead). These costs would remain the same no matter what output the activity produced. An example would be salaries of personnel in purchasing department, depreciation on equipment, and plant security."
Abstract This paper presents the basic forms and methods of accounting for cash accounting and accrual-basedaccounting and compares the two. It examines which form of accounting is more beneficial to specific sectors of the economy and looks at the advantages and disadvantages of each.
From the Paper "In the cash basis of accounting, the business records are "cash in" (deposits to the bank account) called cash receipts, and "cash out" (checks) called cash disbursements. Cash receipts - Cash disbursement = Cash flow. Each month's cash flow is added to the preceding month's cash balance yielding the current month's cash balance.
The cash basis of accounting is more likely to be used by service businesses than by retail or manufacturing businesses. Service businesses usually do not need equipment and can sell a service they perform with nothing more than their own hands and minds. Think of people who are lawyers, writers, public relations and advertising personnel, and accountants."
