Managerial Accounting Term Paper

December 3rd, 2013
Activity-Based Costing and its Impact on Corporate Industries
Activity based costing, also know as “ABC” is the application of gathering data and evaluating all of a companies operational and internal finical overhead information so that top managers can make more accurate and strategic informed decisions to better companies. In the early 1980's traditional costing; which a basic form of costing, was choice of preference with many companies, but traditional costing had its major flaws. Traditional techniques would only provide efficiencies to companies with specific and smaller product selections (Coulter). So in the search of a new systems activity based costing was created, it covered everything from operations, marketing, and all the way to research and development on the internal side of a company. Activity-based costing is extremely important to managers in the sense that it only deals with the internal decision making; which is where most managers focus their views, and that is used along side the traditional accounting. Later on I will present a trade publication that deals with a steel manufacturing company and its journey of activity-based costing throughout they past couple decades. Before then you must have a strong grasp on the concepts of activity-based costing and how they work.
First I will discuss how Activity-Based Costing works in an manufacturing side of a company. Each and every product along with service is assigned a cost that correspond to each telling managers how much of a certain resource they will use. For example a standard light bulb would use a certain amount of kilowatts each month, in activity-based costing these kilowatts are measure and allotted to a cost of the lightbulb (Calculating ABC, 2007). This seems like a fairly straight forward process but before you go ahead and implement activity-based towards your company realize that it can be very difficult and you need to review and make sure your company is prepared for such a change. There are three major things that a company can do to prepare for the implementation of Activity-Based Costing. First converting to a accrual accounting system, this helps account for every activity in cost associated with the product all at the beginning of the expense rather then the end waiting for cash to arrive. The second step is to find the department or person who the costs will be charged and allocate future expenses to the selected places or individuals. The final step is find the procedure costs, that is what the extra cost in each departmental activity will cost (Calculating ABC, 2007). If companies fails to recognize and not follow these implementation steps they could find themselves facing future hardships an enlarged negative side effect of activity-based costing. Like all things in life there can also be negatives to situations some of these negative side effects that activity-based costing can present a situation where it would hurt a company more then help. The main downside of activity-based costing is the fact it is time consuming in relation to the amount of data that will be collected and that it can swede operational mangers attitudes away from their core activities and drive a accountancy sense among their leadership (Calculating ABC, 2007). I have shed light on the downside of the activity-based costing but don’t let that be a deterrent for you to move away from activity-based strategy there are even more positive and beneficial upsides to this style of costing method and they rewards can be seen in many companies. The first of many positive ways activity-based costing can be helpful is in the situation of a dramatic fall in business. No matter the reason of falling profits if your using a traditional costing system it leaves the company with huge amount of overhead to disperse only to few locations, on the other hand if your company is using activity-based costing the system will find unused overhang and delegate the cost to other operations quickly. Another positive of activity-based is it helps costs of simple jobs versus complex jobs. This meaning that traditionally simple jobs are often overpriced and complex are way underprice, activity-based costing helps even this by forming to what the customers needs and demands are at the time being. Even big sellers that show little or less profits can also be helped by the ways of activity-based costing, it can find what is used in both high volume and low as well and help assign the right products to the right places. Traditional based costing can show a lack of information when it comes to non-manufacturing ideas, but with activity-cased it can identity when indirect costs need to be added or done away with. The last way that activity-based costing is more efficient is in situations when some of your inventory is full leading to discounted items for sale while other parts of different inventory sit depleted. Activity-based costing will point this out and make aware to managers that they need to make decisions to help balance the inventory levels (Free, 2007).
Now that you seen the negatives and positives of the Activity-Based costing systems and understand the core concepts of the Activity-Based method I can now present a real scenario of this method and how it works in the field. Catham Steel Cooperation is a prime example of how the activity-based method can transform a company. As activity-based costing was emerging in the 1980's Catham decided to jump on the train itself, they first started the process of change by applying an variable activity-based system to their operational side of the company such as in departments of warehousing and inventories. The activity-based system brought Catham to start ranking their current customers based on how much they bought from their company and the activity profit margin that each customer posses in the products they bought. The results that came out of this ranking led Catham to rank specific customers on 4 levels; A,B,C, and D, customer A being the best and D being the worst. This ranking gave Catham a idea of who their target customers were and to start putting concentrations on making stronger relationships with more important customers. As the years went on technologies changed and Catham found itself and their self made activity-based system less productive, and noted they needed a change. Executives at Catham went out and sought vendors that specialized in activity-based information technologies. What they found was a system that would work with their existing system and would only improve it. The new system could find and apply cost to individual products and take the fixed overhead that come with each product and allocate it to other areas if needed. The new activity-based system didn’t only just end there though, the system also integrated their activity based styles of other departments and specifically their activities in order placement. The system tracked the amount of time that was needed for each type of order; standard, rush, and non-stock, it then applied the cost to the total time rather then on each type of order at the end of the month rather then each individual item. With all of this new innovation it lead leadership of the company to question and be concerned with profitability because of its high level of processing and mass amount of information retrieved. So management had to change the culture of the company to incorporate this new activity-based style in day to day operations. Soon after implementation just like before the new activity-based system helped find the top rated and bottom rated accounts and show that only the select few top rated accounts were making the company their real profit. In this real life situation you can really see how Activity-Based costing system had saved the company money and gives them advantages that the previously would have never held. (Triplett, 2003)
With out a doubt Active-Based costing is a concept that companies should all take under consideration, with emerging technologies and electronic management tools the active-based model truly is the way of the future. Companies that fail to adopt the practices will get left behind watching their competitors leave them in their dust. Activity-based does not only have quantitative aspects but also qualitative ideals as well. In Catham's situation they also stated that not only has it affected their finical sectors, but it has became part of their company culture and everyday employee life as well. Companies culture is truly a key aspect in any part of successful business. (Triplett, 2003) The fact that Catham had the ability to a instilled their own activity-based system before the electronic one really aligned employees and managers goals. When each member of an organization is doing their part to fulfill and excel at tasks such as activity-base costing it takes pressures off the employees and makes for a better work environment.
Understanding the logistics of activity-based costing and researching how it has been used in real day to day operations has really opened my mind to this method. I feel that going the career that I am perusing; supply chain management, will be more difficult seeing that I will be looking value added items and looking at the process as a whole rather then individual products. But there are a couple things I could try to apply as I enter into this job mart. There are a couple major issues that arise from the supply chains and collaborating with activity-based systems. The first is that many supply chain look at quality as a major driving factor more then cost saving. This clash with the ABC model which is strictly about the cost saving and nothing else. The next major area of problem that I see arise is that the supply chain may have restricted budgets that allocate money in their own ways and applying programs such as ABC methods would take these powers away from the supply managers reducing their jobs scope. But moving away from measuring the costs with the materials moved in supply chain and instead applying the same concept to the quality side of the supply chain (Hung, 2011). with this kind of knowledge if I enter a company that has already put activity-based costing into their daily routine I now have some foot-holes to take off and align my goals with upper managements.