activity based costing (ABC) under managerial accounting (Research Paper Sample)

Activity-Based Costing (ABC) Under Managerial Accounting
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Activity-Based Costing (ABC) Under Managerial Accounting
Introduction
Radically, business firms are always committed to finding ways to maximize profits and minimize costs. There exist numerous ways for the organizations to cost the way they operate their business. One of the ways is Activity-based costing (ABC). The method of ABC is the accounting technique that describes all events and the associated costs of such activities (Kim, n.d.). It then directly fixes the related charges on the incident to the output pricing of that particular business, instead of finding cost averages for all outputs. Activity-based costing is the essential element in accounting that helps accountants pick all activity costs and then be in a position to price their goods.
Importance of the study
The ABC strategies allow the managerial accountants to determine efficient use of resources and fabrication of activities contributing to value product creation. Besides, fixing approach weakness of traditional evaluation production, ABC method is significant in solving such problems (Baker, 1998). Besides, ABC methods provide other benefits such as:
* Finding more real costs of production than those calculated from traditional accounting methods of management.
* Concentrates on the real natural behavior of costs, hence helping in a determination of non-value activities.
* Applies various cost drivers that illustrates the direct cause-impact relation between the assigned costs and the assigning bases asked.
* Gives flexibility in assigning to work performed, manufactured products or services offered on various strategic parts of customers.
Objective of the study
Activity-based costing has been applied since in the early 1980s. When implemented effectively, they aim at giving accountants with more correct data of product-cost which can be used in making well-informed decisions about controlling customer relationships, pricing, and process improvements. Furthermore, this kind of costing assigns overhead costs, variable costs and fixed costs to activities (Shim & Siegel, 2012). It is significant in identifying cost drivers. Activity-based costing has two purposes. First is to minimize waste and second is a prevention of cost distortions. Distortion of costs is prevented through the allocation of cost drivers. Cost drivers refer to any event or factor that generates cost changes of activity. Hence, the cost driver is significant aspect and considered to be the heart of the activity-based costing.
Analysis
Fundamentally, activity-based costing adopts the four levels of the cost hierarchy. The facility-sustaining costs which are associated with the costs of events that cannot be determined by individual services or products. The service or product-sustaining costs which are related to supports to specific service or products without the consideration of the number of batch or unit; Batch-level values which are associated to a category of groups; the output unit-level costs which are associated with each unit of a service or product. Output unit level costs refer to the values of events performed on every individual services or product. The batch-level charges relate to the costs of the activities associated with the class of units of a service or product rather than every particular group of service or product. Service-sustaining costs or product-sustaining costs refer to the values of events performed to support each function or products without the consideration of the count of batches or units for which the products are made up. The facility-sustaining costs refer to the value of events that managers cannot locate each service or products but the one that supports the whole organization. Activity-based costing creates a platform for various management with new valuable techniques to help in finding and assigning the costs of products and services more realistically. Besides, it also establishes the way of isolating and accounting for costs in regards to the activities related to such fees.
To implement activity-based costing in managerial accounting, seven procedures are involved:
* Determine the products and services that are related to the chosen costs of objects.
* Determine the product’s direct costs.
* Choose cost-allocation and activities bases to apply for indirect cots allocation assigned to the services or products.
* Determine the indirect costs related to individual cost-allocation base.
* Evaluate the rate for each unit of every cost-allocation base.
* Evaluate the total costs per services or products by summing up all indirect and direct values allocated to services or products.
The need for adapting Activity-Based Costing procedures into the managerial accounting is grounded on four significant causes: Failure in deepening modern systems of cost accounting, lack of contemporary or classical methods of accounting, information requests diversification for the entities of production and management changes in the market position of objects.
The initial cause is as a result of weak and irrelevant information in managerial accounting. The fear of the impact of adopting new techniques still exists in managerial accounting. This makes accountants think that there is no need to engage in performance methods to prioritize entities for any sector (Louderback & Holmen, 2003). This scenario can relatively be resolved by participating and organizing activities of information training at economic or institution agents