Introduction
In this unit, my course task was that of examining how activity based management and activity based costing (ABC) can benefit a company. Activity based costing is generally a costing technique integrated in the early 1990s with a view of helping a big manufacturing company enhance its product costing and organization systems, allowing advantage for competing against lesser-priced rivalry. Activity based costing concerns evaluating the activity and process that is essential so as to realize the goals of an organization and allocating overheads and extra operation cost to those goals in a balanced way, which facilitates an organization to determine the actual costs of manufacturing, promoting, and distributing products (Hermanson et al., 2011).
Other methods
Activity based costing varies from mainstream allocation techniques. Most mainstream costing techniques use a single basis in distributing the non-direct cost to a whole set of products. This technique of distributing non-direct cost often brings about flawed costing data. Frequently a product that has high quantity (and large production costs) is allocated a high cost. Similarly, the cost of a lesser quantity product is frequently understated, and most of the non-direct costs of this product are ignored (Martin, n.d.).
Instead of utilizing a single basis in allocating a cost, activity based costing distributes a cost to activity and product depending on how the cost (resource) is indeed used during the process. By leaving conventional cost distribution techniques and utilizing enhanced ABC techniques of tracking and allocation, Activity based costing provides senior management with an understandable view of costing activities and the profitability of a product (Walter, 2011).
ABC characteristics
Regarding characteristics, activity based costing aims at controlling operations/organization processes with a view of achieving organizational goals. It minimizes key cost drivers and non-value processes and allocates costs to cost-effective value generating operations. It in addition develops performance elements of cost and quality so all stakeholders understand how their operations add to the mission. ABC in addition does not utilize a single basis but allocates cost based on activities and processes (Hermanson et al., 2011).
Benefiting organizations
When determining organizations that can gain from activity based costing, Walter (2011) looked into businesses experiencing a change that has not yet been reflected in their costing framework. For example, implementation of modern systems, a change in a contract, an emerging product or service, emerging or steeper rivalry, and other activities that have changed concerning the organization that have not been incorporated in its costing framework make them good candidates for ABC. Generally, there is an erroneous observation that ABC is only useful in the processing firms, but a service firm can as well attain the same gains through utilization of ABC. All what a company needs to know are its actual costs, which consists of the support needed in selling and distributing products and services (Martin, n.d.).
Implementation
One large company that applied ABC is the Klein Steel, a steel manufacturing organization in America. The company sells over 4,000 goods at a regular margin of 25%. Due to high operation and delivery costs, however, the company’s net margin reduced to 1%. Upon implementing a time-based ABC structure its net margin increased by 9% in approximately 36 weeks (Garrison & Eric, 1999).
References
Garrison, H., & Eric, W (1999). Managerial accounting (9th ed.). Boston: Irwin McGraw-Hill.
Hermanson, H., Edwards, D., & Invacevich, D. (2011). Accounting principles: A business perspective. Managerial Accounting, 2(1), 37-73.
Martin, R. (n.d.) Management Accounting: Concepts, Techniques, and Controversial Issues. Web.
Walter, M. (2011). Principles of Accounting. Web.