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Running Head: ACTIVITY-BASED COSTING 1

ACTIVITY-BASED COSTING 9

Activity-based costing

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Introduction

The concept of activity-based costing (ABC) is established as a costing method that is established to be indirect costs and overheads with regards to the related products and services. This particular accounting method of costing is established to enhance recognition of the relationship in existence between overhead activities, costs, and manufactured products through assigning indirect to products that are established as being less arbitrarily in comparison to the traditional costing method; although various indirect costs, for instance, office staff and management salaries are established as being difficult to assign product  (Zeuner, 2013).

Activity-based accounting is established to be commonly applied in the manufacturing industry based on the fact that it enhances the cost data reliability; thus, this translates to the production of nearly true costs with subject to better classification of the incurred costs by the company subject to the production process. Thus, the application of ABC is made with subject to getting a better grasp with subject to the aspect of costs that enables companies to incorporate appropriate pricing strategies. Therefore, this particular costing system is significantly applied with subject to product costing, target costing, customer profitability analysis, product line profitability analysis, and service pricing. The formula with subject to the calculation of activity-based costing is established as being the cost pool divided by the cost driver established to be yielding the cost driver rate. Consequently, the cost driver rate is applied in the activity-based costing with subject to the calculation of the overhead amount alongside the costs related to a particular activity  (Bradtke, 2007).

The ABC calculation is established with various steps, including the identification of all activities that are needed with subject to the creation of the product6. Secondly, entails the division of various activities into cost pools, which entails all the individual costs in relation to a certain activity, for instance, manufacturing that consequently entails the calculation of the total overhead with subject to every single cost pool. The third step entails assigning every single cost pool activity with cost drivers, for instance, units or hours. Additionally, the next step is the calculation of the cost driver rate through the division of the total overhead with regards to the total overhead with subject to every single cost pool by the total cost drivers. Another step entails the division of the total overhead with subject to every single cost pool by the total cost drivers subject to establishing the cost driver rate, and lastly, is the multiplication of the cost driver rate with subject to the number of the cost drivers. The ABC system with subject to cost accounting, is established on the basis of activities established as being any events specific goal tasks, for instance, setting up machines with subject to production, operating machines, designing products, and distribution of finished goods. Activities are established to be consuming overhead resources with subject to a consideration of cost objects. As opposed to traditional cost measurement systems, which are established to be dependent on the subject to volume count, for instance, machine hours alongside direct labor hours subject to allocation of overhead or indirect costs with subject to products  (Chapman et al., 2011).

How activity-based costing is used to increase profitability by manufacturing organizations

Manufacturing organizations are established as being more likely subject to the application of ABC. The manufacturing sector is established as being more ideal with subject to the application of ABC with regards to their accounting system. Manufacturing organizations are established to be having the capability of tracing costs with subject to direct labor alongside direct material with subject to individual products. The concept of ABC in manufacturing organizations and service industries is established as being the same based on the fact it is established to be serving a similar purpose. The concept of ABC is established to be signifying the fact that the products and services are mandated to pay the cost with regards to the activities performed with regards to output generation. Additionally, the concept of ABC is established to be assigning indirect costs with subject to products subject to an appropriate approach regarding the fact it entails the identification of cost activities that are established to be linked to cost drivers with subject to every single activity. This is established as being a well-known fact subject to the application of ABC in manufacturing organizations, which are established to be experiencing benefits with subject to the aspect of ABC. This significantly translates to the fact that short-run production is established to be requiring setup costs that establish the production process being more expensive. A majority of firms are established to be desiring to enhance the creation of value with subject to owning a strong position with regards to the market through the creation of financial statement surplus. Thus, for the achievement of this particular purpose, it is significant to enhance the identification with regards to detail prices set by the manufacturing organizations with regards to a certain product or work. Consequently, the ABC concept is established to be enhancing the possibility of value creation, which translates to the increment of profit  (Jain, 2006).

The fundamental objective with subject to the application of activity-based costing method is established as being to increase the overall performance of an organization and profitability. The ABC method is established to be doing this through the identification of accurate cost drivers and overhead costs that are established to be leading to a more streamlined business process. In the recent past, organizations have been established to be reducing their dependency on the subject to traditional accounting systems through the development of activity-based cost management systems. Traditionally, managers were established to be viewing the ABC approach as being a much accurate approach subject to the calculation of product cost. Currently, ABC is established to be emerging as being a tremendously useful guide with subject to management action that is established to have the possibility of translating directly with regards to higher profits. Additionally, the ABC approach is established as being extensively applicable with subject to the spectrum of company functions and not restricted to the factory. Based on the fact that ABC is established to be revealing the existing links between the performance of certain activities alongside the demands attached to such activities with subject to the organizational resources, it has the possibility of giving manufacturing managers a clear picture regarding the generation of revenue and the consumption of resources. Thus, the profitability picture established to be arising from the ABC analysis is established to be assisting managers with subject to focus their attention and energy with subject to the improvement of activities that are established to have the possibility of having the biggest impact with subject to the bottom line  (Jackson et al., 2007).

The full exploitation of ABC with subject to being a guide regarding the aspect of profitability is established to be significantly requiring a conceptual break with subject to traditional cost accounting alongside the willingness with subject to acting on the insights provided by ABC analysis. Thus, managers are mandated to refrain from subject to the allocation of expenses with subject to individual units rather than enhance the separation of expenses with subject to matching them to the level of activity with subject to the consumption of resources. Thus, managers are mandated to undertake the separation of the incurred expenses subject to the production of individual units with subject to the particular product subject to the expenses required with subject to the production of different products alongside serving different customers regardless of the units that are consequently produced or sold. The manufacturing financial managers are established to be usually starting the search for increased profits subject to the corporate income statement  (Crosson & Needles, 2010).

The ABC analysis is established to enhance highlights for managers where their actions are likely to be having the greatest impact with subject to profits. Manufacturing organizations are mandated to undertake two types of analysis with subject to their ABC analysis. The initial thing is the fact that the manufacturing organizations are mandated to reprice products, which is established as raising products for products that are established to be making heavy demands with subject to support resources while consequently lowering prices with subject to achieving more competitive levels with regards to high volume products that are established to have previously been subsidizing others. In a scenario whereby the repricing strategy is established as being successful, the organization should establish the new product mix that is established to either be making fewer demands with subject to its resources or the generation of more revenues with subject to the similar consumption of resources. Secondly, managers are mandated to develop for ways with subject to the reduction of consumption of resources. This entails decreasing the number of times with regards to the performance of activities with subject to the same output, for instance, changing products and customer mix or the reduction of the resources consumed with the subject the production and serving of the mix already in existence with subject to the customers and products. This might translate to designing products that are established to be having fewer and more common parts subject to the customization of products subject to the last possible production stage. This could also translate to the implementation of continuous improvement programs with subject to enhancing quality, reduction of setup times, or the adoption of information technology subject to the facilitation of batch processing, customer orders, and products  (Jain, 2006).

Manufacturing organizations are established to be relying on the aspect of strategic and incentive accounting methods with subject to staying profitable regarding competitive markets. The concept of activity-based costing method is established to be having the capability of increasing profitability by saving the business resources, money, and time. The fundamental objective with subject to the application of activity-based costing method is established as being to increase the overall performance of an organization and profitability. The manufacturing organizations are established to be doing this through the identification of accurate overhead costs and cost drivers subject to translating to more streamlined businesses. Thus, in a situation whereby there is an allocation of direct and indirect costs to the product, the managers are established to begin to get an idea with regards to which particular business process is inefficient and the ones that are performing well. Thus, the manufacturing organizations can undertake the streamlining of these particular processes through the allocation of more resources with subject to profitable activities alongside the elimination of processes that are established as being wasteful and costly  (Maher et al., 2011).

The implementation of the ABC method by manufacturing organizations is established to be requiring an investment of both resources and time from the management alongside concentration and dedication from all the members of the manufacturing organizations. This is established as being a complicated and detailed task with regards to every single business activity subject to being broken down into essential business processes. For a majority of manufacturing organizations, it is established to be significant with regards to gaining competitive advantage. Manufacturing organizations are established to be having the capability of tracing costs with subject to direct labor alongside direct material with subject to individual products. The concept of ABC in manufacturing organizations and service industries is established as being the same based on the fact it is established to be serving a similar purpose  (Mowen et al., 2016).

As a result of the ABC process, manufacturing organizations are established as being better with subject to being able to undertake the management of manufacturing performance with regards to the improvement of quality of products and services. Generally, the concept of profitability is established to be increased based on a more accurate product pricing that is established to be offering manufacturing organizations competitive pricing with subject to the maximization of their returns. The most significant thing is manufacturing organization leaders keeping their manufacturing operations profitable and efficient, although the implementation of a new accounting method is established to be costly and time-consuming. Manufacturing organizations are established to be having the capability of tracing costs with subject to direct labor alongside direct material with subject to individual products. In a scenario whereby manufacturing organization managers have the capability to test new accounting methods with subject to gaining the support of team members and stakeholders, the concept of activity-based costing is established to have the capability of taking manufacturing organizations to the next level  (Cokins, 2002).

References

Bradtke, D. (2007). Activity-based-Costing. GRIN Verlag.

Chapman, C. S., Hopwood, A. G., & Shields, M. D. (2011). Handbook of management accounting research. Elsevier.

Cokins, G. (2002). Activity-based cost management: An executive's guide. John Wiley & Sons.

Crosson, S. V., & Needles, B. E. (2010). Managerial accounting. Cengage Learning.

Jackson, S., Sawyers, R., & Jenkins, G. (2007). Managerial accounting: A focus on ethical decision making. Cengage Learning.

Jain, K. &. (2006). Management accounting. Tata McGraw-Hill Education.

Maher, M., Stickney, C., & Weil, R. (2011). Managerial accounting: An introduction to concepts, methods, and uses. Cengage Learning.

Mowen, M. M., Hansen, D. R., & Heitger, D. L. (2016). undefined. Cengage Learning.

Warren, C., Reeve, J., & Duchac, J. (2008). Managerial accounting. Cengage Learning.

Zeuner, P. (2013). Activity-based costing. GRIN Verlag.