Hire Writer Secondly, cost drivers are selected for each activity level to link activities with costs. Thirdly, for each activity level, a cost function is defined to arithmetically describe the relationship between cost drivers and costs.
Joseph Increased competition across the industries has forced companies to enhance their competitive advantage from various methods, including accounting strategies. In this regard, successful organizations are those that have successfully managed to improve their productivity, reduce their operational costs, and improve on their overall efficiency.
The present economic environment is also very competitive and this prompts the manufacturing firms to improve their productivity by applying different methods of reducing unit costs of operations and to increase their revenues Wang et al, Globalization and advancement in information technologies have allowed the manufacturing companies to expand and distribute their products in a manner that improves on their overall performance and efficiency.
The costing system used by organizations helps them in strategy mapping by providing accurate cost information concerning the products and their customers.
Therefore, most companies are steadily shifting their focus from the traditional costing system, to the modern day costing system known as the Activity Based Costing ABC.
Activity based costing is more preferred than the traditional costing method in the manufacturing industry. The rest are classified as overhead costs and they include direct costs such as maintenance, warehousing, quality control, material handling among others.
In the modern times, the activity based costing identifies the specific cost drivers before allocating the costs to equipment, operations, product mix among others. This paper reviews how activity Abc manufacturing company essay costing is used in the modern day manufacturing industry.
Activity Based Costing is an alternative accounting method that does not trace the overhead costs of the specified activities and products that generate them. Activity based costing can also be used for continuous improvement by providing critical information that supports various transformations in the company.
This is possible since ABC maps the company activities and describes their costs structure in terms of activity consumption. Activity Based Costing ABC is a method that allows the management to better understand their products and services together with the customer net profitability Abu-Eker et al, This management accounting method has been applied for the past three decades as a modern alternative to the absorption costing to provide businesses with relevant information to make value bases and effective decisions.
Since ABC emphasizes on activities that consumes the company resources, companies with significant amount of overhead are likely to benefit from it. The economy of any country is highly dependent on the manufacturing sector since it enables them to have products of various kinds, some of which are exported to gain income.
In some cases, a number of manufacturing firms have fallen bankrupt due to their inability to reduce their cost of production and to increase their overall efficiency. The costs and management accounting concepts used in the manufacturing industries provide cost information for decision making.
The rationale for cost management within the manufacturing industry is to provide relevant and timely information to support the management of corporate resources used within the manufacturing systems. This has created more complexity and diversity in the production system, resulting in more overhead costs that need to be properly managed.
This heterogeneity and increase in overhead cost have completely changed the costing structure of the company operations and this has called for a more modern costing system that can adequately address such changes. In such a modern manufacturing environment, the traditional costing system is likely to provide distortion of the unit costs of the products and the subsequent fall of the manufacturing systems.
In the modern manufacturing environment, the traditional costing methods would result into cost distortions and this would be higher in those manufacturing units with greater proportions of overhead costs. Since the traditional costing methods are based on absorption costing and standard costing have failed to measure the company performance since they have not lived up to the expectations of the technological developments of production that characterizes the new era.
The activity based costing avoids biased reporting by allocating the direct labor hours on the group. Since the allocation of manufacturing costs depends on the types of resources collected by the organization, the greater the product consumes the resource, the higher the overhead attached to the product base on one particular activity.
In this regard, the cost factor is an event associated with the activity that results from the consumption of the resources of the manufacturing firms. With the cost of the products based on the activities, ABC enables the manufacturing firms to establish the cost of serving a customer to be ascertained individually.
Therefore, the possibility of dealing separately with the customer costs and the product costs enables allows the manufacturing industry to easily identify the customer costs.
On the other hand, continuous improvement of ABC provides can effectively provide solutions to various problems that may affect the company Wang et al, Since the implementation of ABC can make the employees various costs involved, the employees are in a better position to analyze the costs related to manufacturing various products while identifying those that do not add value and those that add value to the organization.
This allows room for various improvements that are deigned to make the organization make more profits instead of losses. It has been established that the application of ABC has the potential of radically changing the manner in which the management determines a mix of product line, the prices of their products, assessments of new technologies, and the subsequent identification of the location of sourcing components.
A case in point is whereby the manufacturing company may decide to change their system into low volume specialty production at the same cost. It has also been established that the use of ABC enables the management to establish the impact of sourcing decisions by focusing on the elimination of direct labor and additional required activities.
The actual amount of manufacturing overhead that the company incurred in that month was $98, Therefore, Higgins experienced $8, of underabsorbed overhead. In February, Higgins produced 60, widgets, so it allocated $, of overhead. Hi-Tek’s ABC implementation team concluded that $50, and $, of the company’s advertising expenses could be directly traced to B and T, respectively. The remainder of the selling and administrative expenses was organization-sustaining in nature. October 13, / in Essay Writing / by admin Systems Support for a New Baxter Manufacturing Company Plant in Mexico Provide an overview on the background of the case.
Since manufacturing firms are highly technology adopters, ABC enables them to comprehend the impact of new technology with respect to the cost of production in order to avoid wastage of resources.
Since ABC is able to handle such changes effectively, the management is constantly provided with the right data required for economic analysis and strategic decision making.
In terms of manufacturing designs, ABC allows system engineers to test different production designs in their bid to reduce costs and improve on the flexibility of their organizations. This is based on the fact that engineering designs uses a number of insertions and thus it is possible for engineers to distinguish between different components.
Availability of the application ingredients of activity-based costing system in Jordanian tourism companies. Journal of Management Research, 4 2 Customer profitability analysis with time-driven activity-based costing:The Traditional Absorption Costing Accounting Essay.
Introduction. Traditional Absorption Costing. Activity Based Costing. Comparison. Relevance of Activity Based Costing . Why might managers favor this ABC system instead of August’s older system, which allocated all 1 answer below» Product costing in an ABC system The August Manufacturing Company in Rochester, Minnesota, assembles and tests electronic components used in handheld video phones.
Accounting by Manufacturing Companies – The accounting cycle is the same in a manufacturing company, merchandising company, and a service company. Journal entries are used to record transactions, adjusting journal entries are used to recognize costs and revenues in the appropriate period, financial statements are prepared, and closing entries.
BA- Business Functions in Context I Second Semester Tutor Marked Assessment PART A: Inventory Management/ ABC analysis (50 marks) The Dynaco Company stocks a variety of parts and materials it uses in its manufacturing processes. Case study for Wilkerson Company. 1. According to the case, if using ABC, Wilkerson should pool overheads into five activities: machine-related expenses, setup labor cost, receiving and production control cost, engineering cost, and packaging and shipping cost.
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