Evaluation of Activity-Based Costing (ABC) System Assignment Help

Difference between ABC and Traditional Costing Systems: In order to compute cost, ABC system unlike traditional

costing allows an organization to use several drivers and cost allocation bases. This inclusion makes ABC system more complex to understand and apply than traditional. Traditional costing system allocates cost to the individual departments, whereas ABC assigns cost to each activity. Due to this our business assignment help experts says that, ABC is more time consuming costing system in compare to other one (Finkler, Ward & Baker, 2007).

Unlike traditional costing, ABC also provides the organization accurate information through which it enables to eliminate non-valuable activities. Resistance of ABC by Top Management: ABC is a quite complex and difficult for organization to understand and implement effectively. Its implementation requires extensive time and resources that is responsible to increase additional cost and due to this; it could be resisted by top management to adopt ABC system (Rasmussen, Eichorn, Barak & Prince, 2003). At the same time, ABC system also changes the basis of decision making that may also be a reason of resistance. Importance of Activity Rates: It is computed by dividing estimated overhead cost by expected activity of each activity cost pool. This computation helps manager to identify average cost of resources that are consumed by an activity. An activity with high average cost provides an indication to mangers for improving process (Tracy & CPA, 2008). Activity rates also help management to establish benchmarking that enables to identify such activity, which has improvement potential. ABC Inappropriateness for External Financial Reports: There are mainly two reasons due to which ABC system does not appropriate for external financial reports. First, ABC system is responsible to include some non-manufacturing expenditure and to eliminate some manufacturing cost. Secondly, initial stage allocation in ABC system is based over interviews rather than objective data (Rasmussen, Eichorn, Barak & Prince, 2003). Both aspects may affect accuracy in the determination of cost that could present false picture in front of the stakeholders.

Identifying Indirect Cost Allocation Bases There are several aspects that this company should be considered in allocation base for indirect manufacturing cost. The controller of this company must consider the relationship that exists between its cost and cost object. This understanding would enable to determine reasonable allocation base. Cause and effect relation must be also considered between cost object and occurrence of indirect cost, while determining the basis of cost allocation (Amuah, 2012). It would be helpful in determining demand of service that is placed by the several departments. For instance: controller of this company may estimate electricity that could be required to execute function of each machine. This figure would play an important role in determining electricity cost allocations. Perceived benefits that are associated to a cost object must be also used by controller, while determining cost basis. This would enable to obtain physical measures for determining indirect cost basis (Oyer, 2005). At the same time, the ability to bear cost in concern of indirect manufacturing input should also be analyzed by controller, while deciding allocation base. References Amuah, H.B. (2012).

Basis for Allocation of Indirect Costs in a Corporate Environment, Indirect costs allocation in a corporate environment. Finkler, S.A., Ward, D.M. & Baker, J.J. (2007). Essentials of Cost Accounting for Health Care Organizations. USA: Jones & Bartlett Learning. Oyer, D. (2005). Pricing And Cost Accounting: A Handbook For Government Contractors (2nd ed.). USA: Management Concepts. Rasmussen, N.H., Eichorn, C.J., Barak, C.S. & Prince, T. (2003). Process Improvement for Effective Budgeting and Financial Reporting. USA: John Wiley & Sons. Tracy, J.A. & CPA (2008). Accounting For Dummies (4th ed.). USA: John Wiley & Sons. Avail 100% original and complete assignment help services from our experts. We are the most trusted and experienced writers of US,UK and Australia.