...Introduction According to Chand (2015), costing techniques are used by management for controlling cost and making managerial decisions. It systematically records expenses and analyses the cost of each product manufactured or service rendered by an organisation (Hariharan, n.d.). Firms choose to adapt to a specific costing theory that caters accordingly to their needs and objectives. Part 1: Evaluation of Costing Theories Costing theories are very important in business decision making. According to Hariharan (n.d.), they serve managers as a guide to make correct decisions such as what price to quote, whether to place order for inputs or whether to abandon or add a product to the production line. Costing theories also determines the price of the best alternative use of a factor of production and results in an efficient allocation of resources (Chand, 2015). The business will adopt the most profitable production inputs by identifying unprofitable activities, losses and inefficiencies (Chand, 2015) Costing theories also helps the decisions regarding the capital expenditure through the estimation of long-run function (Chand, 2015). This function will be useful to managers when deciding on the expansion or contraction of plant size in the firm and confirming that the present plant size is just nice for the output level that is being produced (Chand, 2015). It improves the overall productivity of an organisation and acts as an important guide in bringing prosperity to the firm (Vitez...
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...|The ratio of adopting ABC | | |system |use of data of different |How do firms consider ABC system | |Activity based costing in |Earlier experience of ABC system |survey |CIMA research on ABC system | |manufacturing: |ABC implementation case studies |Journals |Detail case study of two | |two case studies |comparison & conventional costing |articles |companies | | |system |Different case studies | | |Year 1998 | | | | |Page 137-147 | | | | |2. "Activity-Based Costing." |The structure of ABC and its pit |Study of research magazine & |Potential pitfalls of activity | |Encyclopedia of Small Business. Ed. |falls |article |based costing. | |Kevin Hillstrom and Laurie Collier | | | | |Hillstrom. Gale...
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...Requirements Discuss the advantages and disadvantages of using an Activity Based Costing (ABC) over other costing systems. Also identify at least one company that uses ABC and describe how it benefits the company. Introduction This paper has been formulated in order to determine the basic nature of Activity Based Costing, its advantages and disadvantages. These points are further elucidated by a case study of a Taiwanese hot spring country inn’s implementation of the ABC system. What is Activity Based Costing The Activity-Based Costing theory started in 1987 by Robert S. Kaplan and W. Bruns as a better alternative to the traditional costing method. It has activities as the fundamental cost objects and assumes that activities cause costs and that cost objects create demands for the activities. A traditional costing system uses a single, volume based cost driver. In most cases the traditional system assigned the overhead cost to products on the basis of their usage of direct labor. For this reason traditional cost systems often yields inaccurate product costs and becomes inadequate in terms of calculating true cost to produce specific products for specific customers. ABC system was developed to overcome the shortcomings of the traditional method by using many cost drivers to allocate a indirect costs instead of just using one cost driver such as machine hours. ABC system uses a different approach and allows improvement on the control of overheads by cost/cause relationships...
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...Date of submission: 9th November 2014 To: Mr. John Adam, President From: Controller Subject: Cost System and Capital Budgeting Improvement Please find attached report for Markworth Products for recommendation regarding appropriate costing system as it grows as an organization and capital budget evaluation. Kind Regards, Controller Introduction and Relevant Facts Markworth Products (MP) is a new Canadian public company in the plastic packaging products industry. It develops technologically advanced machinery and moulds that give MP a competitive advantage over its competitors. John Adam has requested us to develop efficient costing system and improve capital budgeting process. Problems Major Problems: - MP does not have an efficient costing system in place to allocate the direct manufacturing costs and indirect manufacturing overhead costs for accurate prediction of product costs. - The current approach for capital budgeting to evaluate new equipment does not meet the current industrial standards of accepted NPV practices Minor Problems: - Holding inventory for clients free of charge - Potential market loss due to emphasis on reducing costs and value leadership - Above average profits due to competitive advantage last temporarily as competitors imitate the technology Qualitative Analysis Industry Analysis: The plastic products industry is competitive and technology is becoming an increasingly competitive factor to improve product processes...
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...activity based costing Activity based costing system is the costing system that it will based on the occurred of events to assign to the products and services that involved in the process of providing the product or service. So firstly, it will identify various activities performed in a firm and then, allocated the overhead costs to activities using multiple cost drives and allocate the overhead costs to products and services based on the amount of it consumed of these activities and resources. For ABC system used of multiple drive however, traditional costing system only based on one cost driver. ABC system able to take account of all the overhead costs such as selling and administrative, marketing and general expenses .The traditional costing systems focus on internal organisation management and are financially-oriented So the firms that operate under contemporary settings may not favourable to use of traditional costing systems due to increasing global competition, advance technological and development of new management system such as total quality management, just in time and flexible manufacturing system. However, ABC could work with other system such as economic value added, total quality management or theory of constraints. In addition, ABC system may able to monitoring the hidden losses and profits compare with the traditional costing system. But for identical output it may not reasonable to implement in ABC system but logical to traditional costing system. Advantage...
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...Recently, Activity-based costing (ABC) is defined as a methodology that measures the cost and performance of activities, resources, and cost objects. Specifically, resources are assigned to activities, then activities are assigned to cost objects based on their use. ABC recognizes the causal relationships of cost drivers to activities (Institute of Management Accountants, 1998). In other words, the objective of activity-based costing is to understand the causes of overhead costs and to identify the real probability of products and customers. Moreover activity-based costing purpose is allocation of indirect costs based on causal activities. Meanwhile, there are three important characteristics of ABC: 1) Simple traditional distinction made between fixed cost and variable cost is not enough guide to provide quality information to design a cost system. 2) The more appropriate distinction between cost behavior patterns are volume related, diversity related, events (decisions) related and time related. 3) Cost drivers need to be identified. A cost driver is a structural determinant of cost related activity. The logic behind is that cost drivers dictate the cost behavior pattern. In tracing overhead cost to product, a cost behavior pattern must be understood so that appropriate cost driver could be identified. In addition, ABC have different structure ranges, such as multiple product, complex product, complex production system and significant variation in volume between high...
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...1. Executive Summary This report covers on the central problem the business encounters and offer solutions to reconstruct certain facets of the business. The main concern that Cambden Cakes faced is the inaccuracy of the method of costing used which results in a misstatement in its profit report. This report is to offer an alternative to the current costing method - Activity-Based Costing (ABC). The following detailed explanatory will be covered in the main body Limitations of original costing system and how ABC system overcome the limitations mentioned; The benefits of ABC system to the company; Comparison of calculated values and differences between the two methods; and lastly The implementation of ABC system and its issues 2. Background on Cambden Cakes Business in Cambden Cakes includes manufacturing and distributing of a variety of cakes and pastry products to supermarkets which are located all over Victoria, Australia. It has a factory in Clayton, Melbourne, Australia which both manufacturing and distributing process occurred, followed by delivery to Cambden Cakes' customers' warehouses which then send out to supermarket outlets. Chris Lee is Managing Director of Cambden Cakes. He showed keen interest in expanding the business and followed up on the interest by modernizing the manufacturing processes in the factory. This result in a shift from being labour-intensive in its original manufacturing...
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...scenario: Two accountants are having a discussion about whether or not their company should use an activity-based costing system. • Contribute to a discussion thread. Take the side of the argument assigned to you by the instructor and, together with your group, create a list of 5 advantages or 5 disadvantages, to correspond with your group's assignment. • Post your group's list in the [Main] forum as an attachment. • Compare the posts from both groups and select one accountant with whom you agree or disagree; explain why. • Post your answer to the [Main] forum as an attachment There are many advantages of activity based costing. Some of these are listed below: * It allows for resource allocation at different activity levels; this information can be used for planning and estimating future expenditure. * It establishes a link between decision-making and cost behavior. * It encourages a critical review of processes related to activities by exposing true cost, and facilitates cost cutting. * It is likely to give a more accurate estimate of product costs especially in multi-product, diverse organizations. * It utilizes unit cost rather than just total cost. * It integrates well with Six Sigma and other continuous improvement programs. Disadvantages of Activity based costing: • There may be problems in defining activities and cost drivers. • It is not always possible to monitor on a frequent basis in the...
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...Wilkerson Company Analysis June 30th, 2014 1. If Wilkerson were to cut prices, based on contribution margin, to just cover short-term variable costs, what consequences could it experience? Contribution margin-based pricing attempts to maximize profit generated from the sale of each unit of product by maximizing the difference between that product’s price and variable costs, or contribution margin. Under this pricing strategy, only variable costs, which increase with a higher sales volume and decrease with a lower sales volume, are considered; fixed costs are assumed to be constant over a range of sales levels and are thereby not factored in when determining prices. Since Wilkerson manufactures and sells three different products, we can use a sales-mix approach break-even analysis to determine the effect that this strategy would have on the company’s sales. In our analysis, we have assumed constant fixed costs and sales mix. Using the predetermined sales mix (calculated by individual product sales as a percentage of total sales) presented in Wilkerson’s operating results and statistics, we are able to calculate a weighted combined contribution margin of 66.12% and fixed costs of $1,365,650 (shown above). This yields a break-even sales revenue of $1,365,650/66.12%=$2,065,387 (see below). Using the sales mix, we can calculate break-even sales units and sales revenue for each product: Based on the break-even operating results above, Wilkerson’s sales revenue will be 4...
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...ACTIVITY –BASED COSTING (ABC) IN SERVICE INDUSTRIES Name: Ira Suri Date: April 23, 2016 Class Name: ACC 560: Managerial Accounting Professor Name: Professor Jones Olajide Abstract This paper explores Activity- based costing in Amazon Company, which is predominantly considered to be a forerunner in online retailing. It offers comprehensive range of products like books, CDs, videos, DVDs, electronics, toys, tools, home furnishings and housewares, apparel, and kitchen gadgets. It has evolved over the years and through this paper we shall evaluate how a time driven ABC cost system can be implemented in Amazon and how will it provide a competitive edge to the company in the market space it maneuvers in and subsequent impact of the business performance. Also, the paper will assess the latent impact of time- driven ABC costing on services provided online with those delivered through traditional channels. Amazon.com Amazon is one of the biggest online retailing companies, which deals in an innumerable collection of products like books, Cd.s, Dvd’s, shoes, clothing, home furnishings, hardware, music and what not. Amazon’s vision is to be globe's supreme consumer centric business; to construct an abode where individuals can uncover and discern everything they might desire to acquire online.” Amazon.com also retails goods from renowned dealers involving Virgin Wines, Hotwire, Toysrus.com Inc., Target, The Borders group, Circuit City Stores Inc., Waterstones, Expedia...
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...Costing Methods: Super Bakery, Inc. George Mancuso ACC/561 Accounting March 18, 2013 Lisa Parker Abstract Super Bakery, Inc., a virtual corporation is a supplier of mineral-, vitamin-, and protein-enriched doughnuts and other baked goods to institutional food distribution centers nationwide (Kimmel, Weygandt, & Kieso, 2009). The company has grown at an average rate of 20% annually since 1990 but persistent challenges of identifying opportunities for cost efficiency in using traditional costing methods requires new strategy. Desire for new “system that would more accurately assign the costs of each order” (Kimmel, Weygandt, & Kieso, 2009, pg. 865), Super Bakery is exploring activity-based costing (ABC) management. Super Bakery, Inc. In 1990, former Pittsburg Steeler’s player Franco Harris incorporated the Supper Bakery, a nationwide supplier of mineral-, vitamin-, and protein-enriched bakery goods to the institutional food market (Kimmel, Weygandt, & Kieso, 2009). As a virtual corporation, Super Bakery’s core business functions are maintained within the company. Other business functions such as “selling, manufacturing, warehousing, and shipping—are outsourced to a network of external companies… to add maximum value to the company while making the minimum investment in permanent staff, fixed assets, and working capital” (Kimmel, Weygandt, & Kieso, 2009, pg. 865). Currently the company is using a traditional costing method that does not identify the accurate...
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.... Managerial 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...
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...Marginal costing and Absorption costing: the concept of marginal and absorption costing and its practical applications on business decisions. Cost Volume Profit Analysis: Relationship, impact on pricing, practical decision making strategies through CVP analysis Standard Costing and Variance analysis: concept and objectives of standard costing, advantages and limitations, variance analysis (Material, labour, overheads and sales variance), practical applications Budgeting and budgetary control mechanism Activity based costing, Responsibility Accounting Target costing Objective Objective of this course is to help student understand: 1. The essence of management accounting-effective use of the accounting information for planning, control and business decision making. 2. To use cost accounting as a managerial tool for business strategy and implementation. 3. To understand analyse the costing tools and their business application for enhancing revenue and profitability of a firm,. 4. To analyse various aspects of costing such as, marginal costing, absorption costing, allocation of costs, standard costing and variance analysis, activity based costing, target costing etc. 5. To understand the process of decision making, planning and budgeting in a business organisation. Pedagogy Lectures Discussions on case studies Term Projects and presentations Discussion and presentation on published research papers on related topics. Text book: Management Accounting: Paresh...
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...Question 1 Introduction This report aims to compare the differences between Traditional costing system and Activities Based Costing (ABC) system. The advantages and disadvantages of both concepts determine which method is more superior for the business. Traditional costing concepts Traditional costing is to consider how much will cost to produce a product. It plays an important role in the business to predicting the profitability of a product. Traditional costing is also well known as the conversional method costing, which refers to the allocation of manufacturing overhead costs to the product manufactured (Harold, n.d.). Traditional costing assigns manufacturing overhead on the basis of volume of a cost driver, such as direct labor hours, production machine hours or direct material hours, all of which are needed to produce an item and the number of units produced. Different from activity- based costing, traditional costing is emphasis on costing information of external financial report in the business, because it provides the value of cost of goods sold. Many manufacturing companies use traditional costing system in order to divide the total cost of a product by the direct labor cost. Generally, the traditional costing method users make the assumption that the volume metric is the underlying driver of manufacturing overhead cost. Hence, under traditional costing method, accountants regard manufacturing costs only to product. Whereas, some cost such as administrative expenses...
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...Activity-based costing (ABC) is a costing method that first assigns cost to activities and then assigns them to products based on the products’ consumption of activities (Lanen, Anderson, & Maher, 2011). Activities are tasks that are required in order for a company to finish its product. ABC was first written about by Alexander Hamilton Church in 1901. He believed that overhead was the cost of different activities of production. He believed that in order to report accurate costs, all of the cost of that product, including portions of overhead, should be reflected in the number (Weil & Maher, 2005). It was made popular in 1988 by Robin Cooper and Robert Kaplan. They defined ABC as “an approach to solve the problems of the traditional cost management systems” (Narong, 2009). This system enabled indirect and support expenses to the driven, first to activities and processes, and then to products, services and customers allowing managers to have a better idea of where their company stands (Kaplan, & Cooper, 1998) Foreign companies were beginning to produce items at a lower cost and higher quality than the United States so therefore, companies needed to be able to accurately identify cost-saving strategies (Weil and Maher, 2005). Conventional costing methods allocated overhead based on a direct cost such as labor. The problem with this is that some activities use more overhead resources then others do and companies are unable to identify the actual costs of processes. For...
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