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... Historically, armed only with traditional management accounting information, managers were forced to achieve their efficiency goals by engaging in "slash-and-burn" or "cut-and-cope" approaches to cost cutting. ...
Traditional cost accounting methodologies have proven to be of little use to organizations in managing unit cost, because they do not provide timely and accurate information on what changes are necessary to reduce cost.
This is where Activity Based Cost accounting methodology (ABC) can be helpful.
“Activity-Based Costing (ABC) arose in the 1980s from the increasing lack of relevance of traditional cost accounting methods. The traditional cost accounting methods were designed around 1870 - 1920 and in those days industry was labor intensive, there was no automation, the product variety was small and the overhead costs in companies were generally very low compared to today. ... For these reasons, and more, traditional cost accounting has been called everything from number 1 enemy of production and questions whether it is an asset or a liability have been raised.”
Whats the difference between traditional costing and ABC methodologies? ...
ABC, however, traces costs to the products that cause them, providing a much more accurate picture. ... ABC thus allocates these indirect costs more accurately and allows staff to manage activities rather than to just manage dollars.
ABC is itself a process that aligns revenues and costs to business processes. ... ABC focuses on your outputs and the activities required to produce them. Knowing these processes (or activities, as they are known in ABC circles) allows an organization to re-engineer its operations to reduce and manage the cost of service/product delivery.
“The question of course is whether ABC has overcome the deficiencies arised from traditional cost accounting methedologies or not? ... In fact, ABC has been called one of the most important management innovations the last hundred years.”
There are three major differences between ABC and traditional costing:
1. In traditional cost accounting it is assumed that cost objects consume resources whereas in ABC it is assumed that cost objects consume activities. ... Traditional cost accounting mostly utilizes volume related allocation bases while ABC uses drivers at various levels. ... Traditional cost accounting is structure-oriented whereas ABC is process-oriented.
We can see from the illustration that the direction of the arrows are different because ABC bring detailed information from the processes up to assess costs and manage capacity on many levels whereas traditional cost accounting methods simply allocate costs, or capacity to be correct, down onto the cost objects without considering any “couse and effect” relations.
Why implement ABC?
There are a variety or reasons why to implement ABC.
Approximate Word count = 2151
Approximate Pages = 8.6
(250 words per page double spaced)
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