Cost Management: The key elements of Activity Based Costing (Coursework Sample)

Cost Management
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1 What is an activity-based costing?
Activity based costing methodology seek to identify activities in an organization, and then assign each activity with resources according to actual consumption/expenditure by each unit (Drury, 2013). The ABC approach involves tracing resource consumption and costing final output. In that form way, there is an examination of the cost used in the production process and the actual output (Drury, 2013).
The key elements of Activity Based Costing
Activity Based Costing consist five key elements. These are, Resources, Resources drivers, Activities, activity cost drivers and cost objects (Kaplan & Anderson, 2013).
Resources: resources are what the firms spend money on. Resources can also be described as economic or the money elements used in performance of various tasks in the organization. Resource drivers entail the basis of tracing resources to activities. It is the measure of the quantity of resource consumed in an activity. An example is the salary computation using the number of hours worked.
Activities on the other hand refer to a unit of work. An example is a hotel organization where activity would be bringing food and the menu as per Drury (2013) arguments. Lastly we have activity cost drivers and the cost objects. Activity cost drivers refers to specific unit of work carried out to serve the customer’s requirements. On the other hand the cost object refers to any customer, product or a service. Essentially cost object is directed to a product or a service (Kaplan and Anderson, 2013).
2 How an activity-based costing differs from a more traditional costing method
Activity based costing is more accurate than the traditional costing method (Drury, 2013). The accuracy is achieved by the factor that ABC takes more factors into consideration before assigning a cost. As a result, the ABC method is more time consuming given the examination that has to be in place before assigning any cost (Drury, 2013).
The ABC method focuses on assigning overhead costs to a specific product (Kaplan and Anderson, 2013). That brings about the complexity nature of ABC method. On the other hand, about the traditional costing, it relies solely on assigning average overhead rates. Therefore, one source of the difference can be attributed to the complexity nature of the ABC over Traditional costing.
Do you prefer ABC to traditional costing methods?
Both the traditional and the Activity Based Costing have various merits and demerits. The most favorable opinion would be that the merits in the Activity Based Costing outweigh the demerits that make it the best costing method. That is realized when you consider accuracy involved in the ABC method. Each function is well analyzed in enabling the creation of a conclusive decision of the cost that is likely to be incurred in all operation functions. By proper accountability of all cost involved, efficiency is realized. Efficiency will assist the organization in maximizing its profits given that wastage is minimized. Therefore, ABC method is preferable over the traditional costing (Tazegul & Kaygin, 2014).
3 What are your thoughts on the speaker's comments and examples?
The talk by Gary Cokins explains the mistrust that exists in the management accounting with respect to cost allocation (Vaciu, 2015). In this case, it is true that having an incorrect figure may mislead the management in decision-making. It is in that respect that a strong costing method is crucial.
Relating to the speaker’s example on a hotel scenario, it is true that it would be unfair to put all the check even. An individual is always willing to pay as per the consumption. The scenario can be used to relate on the organization practice. The firms are willing to pay for the expenses that they know will yield results at a later date. In this case, the expenditure on different units cannot be accounted for, and then that will contribute to business failure.
The Speaker also talks about diversity and complexity (Vaciu, 2015). His postulation is very true. The moment the business has expanded which is the case in the twenty-first century, complexity comes in. That arises following the fact that the units of production are many in number. To control diversity, a strong overhead management system is required. ABC being the most efficient cost management method comes in place at this point that is in line with the Gary’s postulations.
4 What cost drivers?
Cost drivers the factors that influences or contribute to the expense of a Firm’s operations. In other words, it is something that drives the cost of the specific activity (Drury, 2013).
How cost drivers relate to cost pools
Activity cost pools refer to an aggregate of all cost required to perform tasks such as production. Cost drivers relate to cost pools in the following. They relate in that it is from the activity pools that we can get cost drivers (Kaplan & Anderson, 2013). From the definition, cost drivers refer to something that direct cost in a given way. It is as a result that for the cost drivers to be realized, the cost pools must be acknowledged first. Taking an instance of a real estate devel...