Paraphrasing 1082 word in less than 6 hours needed

2.0 Discussion of the statement

“It has been said that modern developments, such as ABC, are sometimes implemented because they are fashionable and not because they provide extra information to management.”

The primary purpose of clothing is to cover the body; fashion and style are choices we make. Some choices are due to an influence from our surroundings; some are necessary, others are not. For instance, although holding an umbrella seems natural when it is raining, it is also a choice to not let oneself be impacted by harsh environmental conditions.

Similarly, in cost accounting, we make choices based upon need. Every investor wants to know where his money is being invested, how much the return has galloped, and whether there is a potential for more. Although traditional absorption costing provides us an overall image of what is happening, paying attention to the details can help better understand what the cost centres are, and how the cost pools are being allocated to revenue generation activity.

Absorption costing allocates overheads to all the units produced equally, such that each unit produced gets its share of overheads absorbed. Based on absorption rate, all fixed and variable overheads are applied to each unit; therefore, the overall product cost includes both direct and indirect costs. This type of costing can be misleading, since a significant amount of cost is involved in the retained inventory. Moreover, since the cost is additionally determined through the allocation of fixed overheads, the information can lead management to rejecting an offer that should have been accepted to cover the fixed cost. Since the cost continuously changes depending upon the activity level, this kind of costing is especially confusing when production levels vary. Although quick, this method could be deceptive for outside parties. Nonetheless, the high costs of inventory balance can ratify the damages of a poor quarter (Cokins, 2001).

Activity based costing is based upon activities associated with manufacturing/producing and selling/delivering of any product or service. Some terms pertain specifically to activity based costing: cost objects, activities, cost pool, cost drivers, and cost hierarchies (Michael et al., 2012).

Cost objects are the entities that trigger the activities for which costs can be attributed, individually, in most cases, for instance, products, services, customers, etc.

Activities are the associated tasks or routines involved in supporting the manufacturing process. Supporting activities include such things as checking the machine before operation. Assembled output, in comparison, is a process activity.

Cost pools are somewhat similar to cost objects; however, they are typically groups of similar activities, regardless of the departments involved (Cokins, 2001). For instance, in any automobile manufacturing environment, the cost pool of painting the vehicles will include the inspection and the painting cost. To understand how much cost can be allocated to the particular activity (for instance, painting one type of car, as compared to another), this can be allocated to each segment of the product line.

In this case, since the amount of surface to be painted, and the amount of paint used, will vary based upon type of car, it casually drives the cost associated to the cost of the car. Therefore, painting a car is a cost object. Finally, these costs can be categorized based upon their necessity of use, the level of activity in which they are involved, or the costs versus effects relationship (Michael et al., 2012).

In reality, ABC application is subjective. It is about understanding the concept, as these essential terms need to be defined to make a sound judgement regarding the allocation of costs to each unit. This takes a significant amount of time, effort, and close collaboration within the departments. Likewise, the definition of cost drivers takes a closer look at how activities flow; not all of the activities are directly related to products, and not all of the activities can be directly attributable to cost objects. Likewise, the fixed overheads are allocated to the products, which can be misleading. The fixed costs do not typically change until a certain activity level is achieved. Ultimately, it may not be sufficiently beneficial to outweigh the investment in it. Moreover, resistance is likely from managers if consensus is not reached about defining cost centres. Whereas one product may be better off under absorption costing, activity based costing may limit the performance based bonus value.

In reality, for a company, where there are many different products, and activities are relatively straightforward, ABC is the way to go. It provides better understanding of cost structure, and assists in decisions pertaining to continuing or shutting down part of the business. Moreover, more information leads to better decisions for the company. For instance, a product having a lesser cost through ABC compared to absorption costing may be re-priced to attract more customers (Rajasekaran & Lalitha, 2011). Likewise, while developing new products, management will have a better understanding of the actual cost of a product, and whether it may be viably sold at a price that the market will be willing to pay (Cokins, 2001).

Determining costs through ABC involves more than just finding the cost. The study of process provides a better understanding of how activities are running, and if their efficiency is being compromised. Moreover, the assessment of costs involved allows management to determine the value chain of each activity, so activities that are not adding any value for the business can be eliminated (Heisinger, 2010). Once management has a comprehensive outlook of the processes involved, it will be easier to implement performance evaluation techniques and monitor continuous improvement (Cokins, 2001).

After weighing the advantages and disadvantages of activity based costing, the statement claiming that ABC is fashion oriented is only contextual in nature. If a small company with very few product lines and relatively simplified activities implements activity based costing, it will not make a notable difference to them. However, if a large company with various product lines across different brands are considering such a move, it will provide them better control over the operations involved, the result will be beneficial for the company, and will eventually help the consumer as well (Michael et al., 2012). Shifting the cost mechanism to ABC is much like an investment for the company; for it, they will get more precise knowledge of what is happening and how is it costing them. This information will allow them to better control the proceedings. However, although cost benefit analysis is essential, fashion is not for everyone. It is only for those who can afford it.