ABC accounting system
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Activity Based Costing (ABC) is said to provide not only a basis for calculating more accurate product costs but also be a mechanism for managing costs. Throughout this essay I aim to explain why ABC is a more accurate method of costing and how this sophisticated system makes it extremely easy to manage costs. Furthermore I will highlight some of the advantages and disadvantages of this costing method.
The accuracy of costing systems, in previous years had become a matter of serious concern. It was believed that accounting systems were grossly underestimating the cost of low-volume products and overestimating the cost of high-volume products.
ABC was introduced as a mechanism to more accurate product costing. Few management accounting developments have stimulated the degree of interest that ABC has engendered. The approach has proved applicable to both the service and manufacturing industry.
"It provides designers of costing systems new ways to cost products and services modify behaviour and focus management attention on matters of strategic importance"
ABC is a conventional four-stage process that assigns overhead costs to product services, jobs, projects or other cost objects. It has provided a basis methodology that permits cost information to be attached not simply to the product but also to the customer...