Activity Based Costing

Activity Based Costing

Introduction

Activity Based Costing - ABC main focus is on management of cost i.e. controlling and reducing costs and at the same time producing superior quality product. Activity Based Costing assists managers in highlighting various costs that different areas and resources has been utilizing and highlighting those areas as well where continuous improvement required. The previous studies on Activity Based Costing main focus was on manufacturing sector as it has been very successful in this area. But the focus of this essay is on the utilization of Activity Based Costing in service sector. According to the researchers, the operation of the business has been uncertain due to competitive environment i.e. business are operating in a world which is uncertain as well as competitive. For this, companies needs to have accurate information on company's cost and this has turn out to be the main weapon for each company's success and survival no matter in which industry they belong.

If company do not have capability of maximizing their cost information collection from different areas of operation and do not have capability of maximizing their utilization capacity, such companies are left with those which can easily adapt to new approaches. Companies where relevant information has been circulating with each level of operations these companies move towards the success ladder easily. Majority of the companies has been discovered to accomplish their mission through installation of the Activity-Based Costing (ABC) systems. Majority of the companies has been stating that before installing Activity-Based Costing (ABC) system, they were facing increasing cost problem with lower quality. Beside this, many companies has been stating their failure in inaccurate cost is due to the fault in planning, fault in design and strategy implementation. This essay will be providing the road map that would be increasing the probability of service company success.

Main Issues or Misconception in ABC

The main issues in the Activity-Based Costing (ABC) is that many people or researcher believe that Activity-Based Costing does not function substantially for service companies as it work good for manufacturing companies. The accounting theory states that Activity-Based Costing has been equally worthful management instrument in service organizations as it is for manufacturing companies. Activity-Based Costing methodology and concept of cost flow can also be employed in service companies. What can be replaced are the particulars such as in hospital patient visit can be used rather than the machine hours or else, activity costs rather than conversion costs of manufacturing (Young, & Pearlman, 1993).

Discussion

Hierarchy of Cost

Cooper - 1996 has explained the behavior of cost in four different levels. These levels are:

Unit level activity which is each time one unit produce

Batch level activity which is each time entire batch has been produced

Product Sustaining Activities which permit production of the products

Facility Sustaining Activities which permit occurrence of the production process

In a service company, different services might use diverse quantity of resource. Competition level and regulation in service sector shape the costing system. As competitive market increase, it demands for extra ...