Free Accounting Dissertations - Very ly, We Assessed How Discrepancies In The Traditional Costing In Terms
Very briefly, we assessed how discrepancies in the traditional costing in terms of allocating overhead costs to outputs rather be assigned or traced to output. Following are some points that will highlight the accuracy and preciseness of Activity based Management -
It provides visibility in the way costs flow through the business.
It establishes the links between activities and those factors, internal or external, that drive the level of activity up or down.
It eliminates the false divide between direct costs and overheads.
It ignores gross margin and uses accurate product and customer contributions as the basis for comparing product and customer profitability.
It exchanges the stilted definitions of value-added and non-value-added for sensitive categories that highlight the subtle impact of internal process failures and external customer behaviour.
3.0 Critical Appraisal and Conclusion.
The development of ABC as a precise accounting principles have been due to many interrelated reasons. Flexible manufacturing systems, total quality management, wide range of products, more customisation and faster and more reliable response to customers have all contributed to its emergence. These factors led many firms to change the structure of cost estimation.
Activity based costing and management have been increasingly used in relation to marketing activities and customer profitability. The scope of ABC systems have spreads its accuracy from manufacturing to service, banking and insurance companies. It is also described as an efficient system that helps to integrate non-financial and financial performance measures.
Research by Cobb, Innes and Mitchel (1992) has highlighted some discrepancies with ABC and ABM. Setting up of the system and data collection and the amount of work required to gather such information on each and every activity are the most common problem. It requires time to select and identify most cost drivers as it may involve managers spending time to identify potential non-value adding inputs, resources and cost drivers. It has also been suggested that as careful consideration is given to each activity, it often leads to identification of too many drivers which is cost prone and they (drivers) tend to increase in numbers. A selected activity cost pool may not be in sync with the organisation cost structure. For example, Purchasing activity may be found in purchasing, production, stores, administration and finance department which may make it difficult to identify the clear ownership of the activity.
And as suggested earlier, some cost drivers such as heating are used over variety of activities and it would not be sensible to mathematically divide such cost drivers. Even if we could, what are the parameters to be considered while differentiating drivers such as heating over a variety of activity ?
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