...Recommendation for Implementation of Activity-based Costing Joann Harper BU264: Managerial Accounting, Spring 2011 Dr. Henry Bryan April 13, 2011 Outline I. Introduction A. Comparison of traditional costing vs. activity-based costing B. Pros and cons of activity-based costing C. 4 companies selected for review i. General Electric ii. Dennison Manufacturing Co. iii. South-western Ohio Steel Inc. iv. Insurance companies D. Thesis Statement: An examination of four companies that have successfully implemented activity-based costing/activity-based management has led to my recommendation that transitioning to activity-based costing is the right move for our company. Although there are many benefits to activity-based costing, we would directly benefit from the relative ease of implementation for a company our size, the ability to view our product costs differently and target process improvements which in turn will lead to an improved line of products and allow us to be more competitive in our market niche. II. General Electric A. A brief history of activity-based costing B. Outcome of General Electric and activity-based costing III. Dennison Manufacturing A. How Dennison Manufacturing uses activity-based costing B. Outcome of Dennison Manufacturing’s implementation of activity-based costing IV. South-western Ohio Steel...
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...restoration in order to strengthen their position in the global economy. The attention focuses on product quality, processes for the production, and improving workforce. However, many companies are still using the same traditional costing systems, Cooper and Kaplan (1991).The absorption costing paved way due to the lack of visibility for indirect costs so the ABC has been adopted by many organizations rapidly. According to Krajnc et al. (2011), the main difference of ABC to absorption costing lies on how they treat indirect production costs (overheads) and sales. The fundamental goal of ABC is to identify as much as possible direct relationships between products and resources consumed through activities conducted from production to disposal. The ABC system is based on the assumption that the support activities such as activities and sales, the cost of which traditional systems characterized as overheads, offer opportunities for the implementation of activities, and thus are not just for sharing costs. In an absorption costing when the volume of overheads is larger, the likelihood of distortions in reported costs is also greater. In general, overheads that exceed 15 percent of the total cost can cause inaccuracies, Turney (1996). Many companies had major problems by these inaccuracies and so they started using ABC. The traditional approach to cost allocation consists of three steps: Concentration of costs in the productive and non - productive parts. Allocation of the cost of non-productive...
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...purpose of this report is to present a comparison of the profits of E-Commerce consulting and Information Systems consulting lines of DBS Consulting Services, using the Activity-Based Costing system (ABC) and the conventional costing system based on computing hours. ABC provides more detailed and accurate information than the conventional costing system because ABC is based on consumption of resources by production of a product or service line and focuses on the activities that drive costs, recognising that activities consume resources. The conventional method allocates overhead costs based on hours consumed (in this case computing hours), which may not represent the actual consumption of indirect resources expended by the service. A costing system should provide information to help minimise waste, but should not be wasteful in it-self . The resources required to design, implement and maintain a costing system should be less than the benefit derived from the use of the system. This report is to compare the conventional costing system against an ABC System for DBS Consulting Services and will discuss the following: 1. ABC improving costing accuracy 2. Profitability of DBS Consulting Service using conventional costing procedures and ABC 3. Recommendation of the adoption of ABC based the results conventional costing and ABC 4. Aggressive expansion? 5. Factors to be taken into account when implementing ABC 6. How to encourage positive reactions. 1. ABC IMPROVING...
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...Activity-based Costing Activity-based costing, is a system that follows a two-stage procedure to assign overhead costs to products. It identifies activities in a company and assigns the cost of each activity resource to all products and services according to the actual consumption by each. As revealed in the article, this costing method had both pros and cons. The article favored the advantages of the ABC method although the satisfaction scores were below the average for all tools used. For those companies that disfavored ABC method, the most common complain was that it took too much money and time using this method, and the method might not capture the complexity of their operations. In fact, ABC method is not production-specified. For production costs, standard costing was still “kill of the hill” with a usage rate of 42% according to the article. However, it is inaccurate to say that ABC method is increasingly being abandoned, only four out of 141 organizations previously used ABC but no longer use it according to the survey. In addition, the survey revealed that around sixteen percent companies considered ABC but chose not to implement it. The main concerns of managers of those companies regarding which cost-measurement system to choose were that they were not sure if it was a better way to allocate cost, if it accurately reflected how resources were used, if the information was timely, and if updating the system was difficult. Having said about the disadvantages and...
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...costs based on volume of production or proportionally to sales revenue. Such approach usually underestimates costs for low-volume products or services and over-estimates costs of high-volume products or services. To avoid such situations Activity Based Costing (ABC) system was developed. ABC system main principle is to identify main activities of the company, group costs of these activities, identify how these activities can be measured and assign costs to products or services though these measures. ABC system helps managers to allocate costs more accurate to final products or services. However, ABC system has some limitations. For ABC implementation company needs a lot of resources (trained personnel, additional IT and information resources). Some of the potential users are often change their mind of ABC implementation after expenses for system implementation and maintenance are calculated. Other disadvantage is the complexity of the system. Implementation of ABC system could be highly complex if company has a lot of products and need to allocate its costs to a number of activities. Support and maintenance of such systems is complicated and time consuming process. ABC system gathers and provides valuable information for decision making. This approach is called Activity Based Management and could be used to improve efficiency of the company. Notwithstanding its limitations, recent surveys confirm that ABC system is useful and used in a number of small and big companies around...
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...Introduction to Activity Based Costing (ABC) University of Pittsburgh Pittsburgh, PA Introduction to Activity Based Costing (ABC) Internet ABC Online Presentation This page and this presentation are created by Narcyz Roztocki. Click here to start Table of Contents Activity Based Costing (ABC) A typical situation in a small manufacturing firm Common beliefs Reality Why is a new cost management system needed? Why is the knowledge of the “true” cost of a product so important ? http://www.pitt.edu/~roztocki/abc/abctutor/index.htm (1 of 4)1/28/2005 5:20:20 AM Introduction to Activity Based Costing (ABC) Why is the knowledge of the “true” cost of a product so important ? (cont) Major factors for determination of market price Ways to determine object cost Total cost for a cost object Traditional Cost Accounting (TCA) TCA in a company TCA in a company (cont) Activity Based Costing (ABC) ABC Basic Premise When to use ABC ABC Steps ABC Illustration 1. Identify activities ABC Illustration 2. Determine activity cost ABC Illustration 3. Determine cost drivers ABC Illustration 4. Activity data ABC Illustration 5. Product cost calculation Product cost TCA vs. ABC Summary of ABC approach http://www.pitt.edu/~roztocki/abc/abctutor/index.htm (2 of 4)1/28/2005 5:20:20 AM Introduction to Activity Based Costing (ABC) If you want to improve the operation or quality of your business, or just learn more about ABC, Economic Value Added and...
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...Running head: ABC Systems: Are they Advantageous ABC Systems: Are they Advantageous Jamie Parson Liberty University Abstract Activity based cost accounting provides companies with detailed and pertinent information that enables them to accurately cost the manufacturing products. Although it is at time confusing the use of an ABC system allows managers the details they need to make educated decisions about production and costs. The use of the ABC system is not always the most popular way for companies to go, but is it worth it? ABC Systems: Worth the Work? Activity Based Costing or as it is more commonly labeled “ABC” is a costing system that firsts assigns cost to activities and then assigns them to product based activities used towards that product. Costs are assigned to activities in a detailed manor so that detailed costs per activity are available. Once costs are assigned to activities they are than assigned to products based on the products use of that resource. ABC techniques allow businesses to decide which products, services, and resources are increasing their profitability, by providing more detailed information to management. The implementation of an ABC costing method it not right for all corporations; however for the corporations that fit the model for an ABC system, managers are more educated to make informed decisions about the true cost of a product. The use of this system allows more accurate and cost effective: pricing, costing, process improvements...
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...Robert S. Kaplan and Robin Cooper was designed the activity based costing (ABC) method in 1988. It was felt that there was a need for more accurate and up-to-date information and a more proactive approach to planning and managing the costs. ABC is a process to identify the costs of all activities and allocating, applying, assigning or tracing costs to products. Activity based costing is a costing technique, tool, system, mechanism or approach. It may be used in addition to the current traditional system or used in place of it. This will enable the new system to be applied consistently so that the opportunity to revert to old ways is limited. Activity based costing is aims to cost the products independent of output volume and to apply overheads on the basis of causes and effect. Besides that, it is also aim to trace all the costs to products. The underlying assumption of ABC is that a product causes activities, activities cause costs and therefore activity is related to product costs. In other words, since activities consume assigned resources and products consume activities, the costs of products are the cost of resources. Its main focus is on the relationship between activity, cost driver, cost, cost pool and cost object. Traditional cost accounting is inadequate so that become activity based costing more relevant. Activity based costing gained support because of the limitations of traditional cost accounting. It is focuses on departments, cost centres or divisions and not...
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...The implementation of Activity Based Costing (ABC) in Chinese refining manufacturers Table of contents 1. Introduction 2 1.1 Research background 2 1.2 domestic and foreign research status 4 1.2.1 Activity-based costing development process 4 1.2.2 Status quo of Activity-Based Costing Development and Application in China 6 1.3 research contents 8 2. Related theories 9 2.1concept of ABC 9 2.2 rationales 10 2.3 difference between ABC and traditional costing 12 2.3.1. Different calculating targets 12 2.3.2 Different calculation 12 2.3.3. Different Finished goods costs term 13 3. Research methodology 13 3.1 case study 13 3.2 The survey method 13 3.3 Literature 14 4. Research Results 14 4.1 problems of traditional costing method in oil refining enterprise 14 4.2suggestions for Chinese enterprises’ application ABC 15 Bibliography 15 1. Introduction 1.1 Research background With the rapid development of the national economy, enterprises’ competition is increasingly fierce; many companies are using advanced science and technology to achieve competitive advantage in the market. Market competition and technological progress are the two fundamental economic factors which generate activity-based costing. Since The beginning of 1980s of the 20th century, the activity based cost method is paid a wide range of attention; the developed countries gradually adopt it in a number of advanced enterprises...
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...industries, such as construction, mining, utilities and nonprofit organizations. He believed that all of these businesses needed to consider that the costing in different departments within a company could be controlled through cost accounting. Even in the 1960’s accountants and system designers developed cost accounting to do more than measure performance. Cost accounting was an integral part of planning and control in businesses. After that, the concept of activity-based costing (ABC) was introduced in the US, initially in the manufacturing sector during 1970s and 1980s. Robert Cooper and Robert Kaplan brought the ABC concept to light and published the body of knowledge in the Harvard Business Review in 1988. Cooper and Kaplan defined ABC method as an approach to solve the problems of traditional cost management systems; that is, the conventional cost accounting systems are often unable to identify correctly the true costs of processes. Consequently, management and quality professionals are unable to make sound decisions or make decisions based on the misrepresented data. On the other hand, the ABC objectively assigns costs based on the cost-and-effect relationships. Then in year 1987, Robert Kaplan and W. Burns published in their book Accounting and Management: Field Study Perspective, the ABC body of...
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.... | Activity Based Costing | | | | | . | Executive Summary The success of any business that offers a product or service is greatly dependent on the ability of the products it offers to compete in a market. If a firm can determine its costs and the demand at each possible price offering it is likely to find the market price that maximizes profit. (Bakken, 2012). Hence, it is important that companies employ strategies that will ensure that cost allocation is accurate and gives management an accurate view of production cost. Having a full picture of every production step and their respective cost can help management make better pricing and sells decisions. This paper is aimed at exploring the process of cost allocation, specifically, the Activity Based Costing System (ABC). It examines how the ABC system diverges from the previous traditional accounting system. It highlights the advantages and disadvantages of the ABC model, and presents an alternate approach that tries to fix the loop holes that exist in the ABC system. This paper shows that the analysis of costs and resources used in the production of goods and services is the most important tool needed in determining business performance (Veres, 2011). Cost Allocation: Purpose and Process When a firm produces more than one product or provides more than one type of service, a resource may be shared. This shared resource places a financial burden on the firm. Cost allocation is the process...
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...Accounting (ACC560) 04/25/2015 Introduction Activity-Based Costing (ABC), a costing system which is more reliable than traditional cost accounting, has been implemented in manufacturing companies for more than a decade. In many cases, the ABC implementation has contributed substantially to a more efficient use of overhead resources, and therefore, has led to an impressive cost savings. Many service companies, in their experience of high overhead and high capital cost, have costs which are left untraced or are allocated arbitrarily. The resulting distortions may provide misleading information to the management and may lead to poor decision-making. A successful business usually starts with a vision statement that gives detail to potential opportunities of the organization. Managers must have the knowledge to understand the concept of choosing a strategy that can be beneficial to the business operation. Using the information provided by ABC, companies will be able to cut costs, review pricing policies and determine more profitable mix. This paper will evaluate how AOL- time warner can implement an ABC system, how the system can help maintain a competitive advantage, the impact the system has on online business sale. Company history Time Warner, as we know it today, is the result of many mergers and acquisitions. The company’s history can be traced back to 1922, when Warner Brothers was established. The company was later renamed to Warner Communications. Quantum Computer...
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...Management Accounting Research, 2000, 11, 349–362 doi: 10.1006/mare.2000.0135 Available online at http://www.idealibrary.com on Activity-based costing in the U.K.’s largest companies: a comparison of 1994 and 1999 survey results John Innes*, Falconer Mitchell† and Donald Sinclair* This paper reviews the results of two U.K. surveys of activity-based costing (ABC) in the U.K.’s largest companies. These provide an opportunity to assess the changes that have occurred in the ABC adoption status of companies over a recent 5-year period. For the ABC users, some comparative information is provided on the nature of the ABC systems in use, their designers, the uses to which they have been put and the levels of success and importance that participants attribute to them. For the non-users, the reasons for their lack of commitment to ABC are explored. c 2000 Academic Press Key words: activity-based costing; perceptions of success; survey. 1. Introduction Activity-based cost/management (ABC)1 has now maintained a high profile status as an important management accounting innovation for well over a decade (Bjornenak and Mitchell, 1999). However, despite a strong and durable advocacy (Cooper, 1988; Cooper and Kaplan, 1991, 1992, 1998; Kaplan, 1992), several reservations have been expressed concerning (a) the substance of its practical attraction (Bjornenak, 1997; Gosselin, 1997; Malmi, 1999), i.e. that it may be a fad or fashion, engendering a bandwagon effect rather than a genuine and...
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...2010-023X Factors Influencing Activity-Based Costing Success: A Research Framework Zhang Yi Fei and Che Ruhana Isa becoming more and more popular [3-7] ABC aims to provide accurate costing information to managers to allocate activity costs to products and services by applying cost drivers [8]. Academics who advocate ABC, such as, Cooper and Kaplan [9], and Swenson [10] argue that it provides more accurate cost data needed to make appropriate strategic decisions about product mix, sourcing, pricing, process improvement, and evaluation of business process performance. These claims have led many firms to adopt ABC systems [8]. The benefits of ABC and its positive impact on firm’s performance motivated a numerous studies which examined various aspects of ABC. Among such studies are McGowan [11] who assessed the integrity of ABC success, Innes and Mitchell [4, 12] and Yanren [13] who conducted research on factors affecting ABC adoption, and Shield [3], Shields and McEwen [14], Gosselin [15] and Baired et al.[16, 17]who concentrated on factors influencing ABC success especially at the implementation stage. However, there is mounting evidence that suggests most of firms are experiencing problems in implementing ABC and, in some extreme cases, ABC implementation is not successful [3], which later resulted in abandoning the ABC systems altogether [15]. Questions arise as to why ABC implementation is successful in certain companies and fails in others. Based on the contingency theory, researchers...
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...Activity Based Costing 2.1 Traditional costing system Before going into detail on the activity based costing method, here is a brief presentation of the traditional costing system and say how it differs from ABC. The traditional costing system traces indirect costs to products/services through a single, or a few rates. Firstly, indirect expenses are assigned to production and service departments. After that, the costs from the service departments are moved to production departments. Separate rates are made per department and indirect costs are assigned to products/services through direct labor or machine hours. What we will see with ABC is that this method differs so that activities are used instead of departments and indirect costs are assigned to main activities in a company. One looks at what drives costs and does not only use labor or machine hours. 2.2 What is ABC? Activity based costing is like a bag of tools from which anyone can take what they need at the time. On the other hand, ABC might be closed in the everyday accounting practices as it tends to promise more accurate product costs. This method is mostly about experimentations. Nowadays the name ABC is full of competing and contradictory ideas and practices with so many authors that there appears to be no clear guidance. What is clear is that this method simply cannot be separated from the activities and events to which it is connected. According to Langfield-Smith, Thorne and Hilton, an activity based costing...
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