ACC 350 Week 7 Discussion
Use the Strayer Library to identify one (1) manufacturing company that currently uses the Activity-Based Costing (ABC) system. Document and present the characteristics discovered to show the benefits claimed by the company due to their choice of ABC Costing. Select a different company from what has been posted.
Support your rationale with examples and provide one academic resource.
Example 1 Activity-based costing is a costing method designed to provide managers with cost information for strategic and other decisions that can potentially affect capacity and therefore, the fixed and variable costs (1). It is used as a supplement to the usual costing system used by a company. This method is used internally for managing and decision-making activities. Manufacturing companies use ABC to calculate unit product costs to manage overhead and make decisions (1). The ABC system is based on activities, which is any event that causes the consumption of overhead resources (1). Under this system, activity is also considered any event that is a cost driver. The cost driver or activity driver is used to refer to an allocation base. Cost drivers include events such as machine setups, maintenance requests, consumed power, purchase orders, inspections, or production orders. The two categories of activity measures are transaction drivers, which counts the number of times an activity occurs, and duration drivers, which measure the amount of time required to perform an activity. This method will show the actual costs of products as well as provide insight as to why these products cost what they do (2). This information provides opportunities to implement improvements and predict future costs. Drivers are used to trace the resources to activities then the activities to the cost object (2). General Motors is one of the largest automobile manufacturers in the world. After a lengthy study that began in 1986, the implementation of an ABC system improved its costing techniques (3). They were able to identify activity centers and cost drivers and were able to perform an analysis of their existing costs versus the ABC costs. The study revealed that the ABC data had the potential to support decision making in the areas that were investigated and that there were significant changes in production costs at most of the production sites. It was also recommended to adopt the ABC system for the benefit of cost reduction.
1. Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial accounting (16th ed.). Boston, MA: McGraw-Hill.
2. Jurek, Paul. (2012). Activity-Based Costing Applied to Automobile Manufacturers. https://www.manufacturing.gatech.edu/sites/default/files/uploads/pdf/Fin al%20version%20_Jan%2026%202012_.pdf
3. Anderson, S. W. (1995). A Framework for Assessing Cost Management System Changes: The Case of Activity Based Costing Implementation at General Motors, 1986- 1993. Journal of Management Accounting Research, 7, 1– 51. http://libdatab.strayer.edu/login?url=https://search.ebscohost.com/login.aspx?direct= true&db=bth&AN=9510062221&site=eds-live&scope=site Example 2 In addition to complexity of implementation that can add additional costs, some of the other disadvantages of the ABC are:
- Complexity of analysis that have to be done accurately
- Resulting data is only good as the assumptions that went into the division and cost estimation of the activities being tracked
- Difficulty assigning executive salaries and administrative costs to various type of products
- Reports can be used only for internal purposes, so additional reporting is required for regulatory purposes
- Many companies meet resistance from employees on all levels
In early 2005 the proponent of activity-based costing, Professor Robert S. Kaplan, published an article in the Harvard Business School Working Knowledge entitled "Rethinking Activity-Based Costing." The article acknowledges problems with implementing ABC programs. It appears ABC has proven to be too much work for many and too complicated for many companies to use and maintain over time. The author insists that "the solution to problems with ABC is not to abandon the concept." He goes on to outline a new ABC program which he and his co-author, Steven R. Anderson, call time-driven ABC. New time-driven ABC method is described as a simplification of the original ABC method.
Time-driven ABC requires, for each group of resources, estimates of only two parameters. First, the entire overhead expenditure of a single department divided by the total number of minutes of employee time available. Second, an estimate of how much time it takes to carry out one unit of each kind of activity, for example, the time it takes to process one order. This simplifies greatly the work required to set up an ABC system and may make its implementation more feasible for smaller companies.
https://www.inc.com/encyclopedia/activity-based-costing.html
Example 3 Activity-Based Costing is a costing method that assigns overhead and indirect costs to related products and services. This accounting method recognizes the relationship between costs, overhead activities, and manufactured products, assigning indirect costs to products less arbitrarily than traditional costing methods.
The manufacturing company I chose is UPS. UPS developed ABC systems to:
• Link operating behavior to product and customer segment cost. • Support existing and new product pricing decisions. • Report consistent and reliable profitability results by product.
The benefits claimed by UPS due to their choice of ABC Costing is activity and customer analysis help them determine the most efficient way to minimize cost for both UPS and the customer, and the benefits include:
• Focus on operational improvement efforts on high impact areas. • Change shipping behavior to minimize the cost impact on UPS's network. • Modify the distribution networks to reduce total transportation costs. • Integrate logistic solutions to help optimize benefits across the entire value change.
Source: https://eds-b-ebscohost- com.libdatab.strayer.edu/eds/pdfviewer/pdfviewer?vid=14&sid=1b67fbb4-2283-4cd6- b676-49e6e16e243e%40sessionmgr103