Accounting: Allocation of Fixed Assets

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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.).


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).

Concept and concept description Benefit to organization

Lean manufacturing

This refers to an activity-based approach focused on realizing the shortest feasible time period through elimination of waste. Lean manufacturing originated from the Toyota Manufacturing Model and its major force is for increasing the value-added activities through elimination of waste and reduction of emergency work.

The method frequently reduces the time between a customer’s order and delivery, and it is structured with a view of greatly improving profit margins, client fulfillment, production cycle, and worker self-esteem. The benefits of lean manufacturing basically include: lesser costs, increased production, and reduced delivery time. The phrase lean manufacturing is focused on representing half the staff input in the organization, half the production room, half the resources in terms of machinery, and half the designing time in developing new products in the shortest time feasible (Hermanson et al., 2011).

Basically, lean manufacturing focuses on the activities, methods, strategy and plans being adopted by any organization globally that focuses on reducing non-value and less useful operations, assignments and conducts in the working setting. Lean manufacturing not only minimizes working costs but in addition focuses on boosting, restoring and critically increasing the competiveness of an organization. There are various benefits of implementing lean manufacturing practices. These include:
  • Minimized production period: when the production period is critically reduced, the day to day costs sustained from salaries is reduced, hence significantly reducing time.
  • Lower working facility: one of the key aspects of keeping a company in operation is adequate production space. Through adoption of functional lean processing practices and methods, it is approximated that the company will lower its actual working space needs by almost 8%. Even though the percentage is small, radically it will result to increased effectiveness and reduced operational costs. Other benefits include: increased productivity and profitability (Hermanson et al., 2011).

Total quality management-TQM

This is a coordination method focused on enhancing quality and production in companies, in particular businesses. It is an inclusive work concept that functions horizontally across a business, including all sections and staff and expanding outward and inward to take into account both supplier and customer (Walter, 2011).

TQM is an organization framework utilized for constantly improving all sections of an organization’s activity. TQM can be utilized in all operations in the organization and identifies the significance of staff participation. A company that implements a TQM framework will achieve the following gains: enhanced client fulfillment and service/product quality, increased productivity, enhanced communication within the organization, lower working costs, and reduced wastage and amend faults (Walter, 2011).

Theory of constraints (TOC)

Basically, theory of constraints is utilized for helping an organization determine and prevail over challenges to optimizing profitability, if such hindrances are manufacturing challenges, organization guidelines, operational strategy, inadequate promotion, supply chain concerns, staffing issues, cash inflow and outflow barriers, etc.

The objective of any business is to create wealth. A dominating aspect behind theory of constraints is the target at generating more income rather than minimizing cost, but there are no actual limits to how much income an organization can generate (Martin, n.d.)

Based on a realistic perspective, it is unrealistic to try to minimize cost (human resource, materials, or overheads) by over approximately 25% with no effect to the capability of generating income. One important gain of utilizing theory of constraints practices is that removing barriers creates not only increasing growth but also break-even opportunities. Another major achievement is that large percentage of the increment can be achieved utilizing less or no investment (Martin, n.d.).


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.

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