ABC

Activity Based Costing

Activity Based Costing

Introduction

This term paper of advanced management accounting discusses the basic concepts of activity based costing. The major focus of this work is to examine activity based costing in small hospitality business, called Hotel Mule. For this purpose, information is extracted from various articles, journals and web to gain in depth insight of the cost accounting concept. Further, it presents the profit and cost analysis in hotel operations. In addition to this, it discusses the benefits and drawbacks of the activity based cost method.

Discussion

ABC accounting system records all the activities which a company carries out in the fiscal year and then it may assign an indirect cost to the product. Furthere, ABC costing method strives to make a relation between the activities, cost and products and then accordingly it may assign the cost to each product (investopedia.com, n.d).Thus, the system applies the ABC monitors and cause-and-effect relationship between the cost drivers (database distribution) and the costs, and not conditional connections, as is customary in the traditional calculation (cimaglobal.com, n.d).

Under the traditional technology of distribution of indirect costs, are made apportionments of costs of service centers to production centers in hospitality industry, but the cumulative costs in the production centers are assigned to products or processes usually based on machine hours, man hours or units produced, but these rules do not accurately reflect the resources consumed by different products or processes (Bradtke, 2007, n.d). The methodology of Activity Based Costing is based on the fact that a company to produce products or services need to perform activities which consume resources, so activities are funded first and then the cost of activities are assigned to different cost objects (products, services, customer groups and regions, processes, etc) consuming such activities, in such a way we achieve a much greater accuracy in determining the costs and the correlative profitability.

The ABC in Action Small hospitality management systems of activity-based costing (ABC) located overhead costs to specific activities causing them, thereby providing a safer product cost. Four key concepts differentiate cost-accounting systems based on activities of the traditional cost accounting, which allows systems to activity-based cost data provide more accurate product (Brimson, 1995, n.d)

Accounting Activity

In a system based on activities, the product cost is the sum of all costs required to manufacture and deliver the product. The company development activities consume resources and the availability and use of resources create costs. Accounting activities of an organization breaks into a structure of activities that provides a reasoned analysis of cause and effect of how the key objectives and associated activities create costs and result in products (Stefan, 2010, n.d).

Cost Drivers A cost driver is an event that affects the cost/performance of a group of related activities. The family cost drivers include the number of machine configurations, number of engineering change notices and purchase order number. The cost drivers reflect the demands placed on activities in the activity levels and production. By controlling the driver cost can eliminate unnecessary costs, which results in ...