Understanding the Concepts of Activity Based Costing

Understanding the Concepts of Activity Based Costing

Introduction

Managerial and financial accounting differs from each other in various aspects. Some of the major differences are highlighted below: Even a decade ago, the role of managerial accounting was much different from its role in today's business environment (Ken, G. 2010). Traditionally, managerial accountants operated a business in a strict capacity of staff, normally separated physically from their managers to whom they deliver information and reports. However, today managerial accountants operate as internal business consultants, who work side-by-side in cross functional teams with their supervisors from all areas of the company. Nowadays, organizations mostly locate their managerial accountants within their operating departments, near their managers, in order to facilitate decision making and problems solving, rather than isolating them in separate accounting departments like old days (The Ken, G. 2010). Managerial accountants have taken the roles of leadership in their teams and are required for the valuable information they deliver. Thus, the role of managerial accountant has transformed from financial historian and number cruncher to become a trusted advisor and business partner.

Discussion

Today companies, especially those with many products, large overhead costs and fierce competition, are adopting the Activity Based Costing and cost instead of assigning each category of expenditure tracking on an object of costing. The new situation reflects the understanding of key activities, costs, structure and strategy of an organization, will result in improved design and effectiveness of it and especially the costing of products and services elements that will enable the success of any strategy (Lana, Y., Fei, P., 2011). For these reasons, it is clear that the implementation of the analysis of the value chain and the ABC, should contribute to the modernization of the global economy and thus the same, will achieve the company's strategic objectives. Models of activity based accounting depend on two fundamental premises:

1. The products consume activities

2. Activities consume resources.

Part A (Computation of Activity Based Overhead Rate)

Market Analysis Activity Based Overhead Rate

Total Cost Allocated for Market Analysis Total Number of Hours for Analysis

= 1050000 / 15000

=70 dollars per hour

Production Design Activity Based Overhead Rate

Total Cost Allocated for Production Design Total Number of Hours for Product Design

= 2350000 / 2500

=940 dollars per design

Product Development Activity Based Overhead Rate

Total Cost Allocated for Product Development Total Number of Product

= 3600000 / 90

=40000 dollars per product

Prototype Testing Activity Based Overhead Rate

Total Cost Allocated for Prototype Testing Total Number of Tests

= 1400000 / 500

=2800 dollars per testing

Part B (Computation of Cost with 1800 hours of market analysis, 280 product designs, 10 product developments and 92 engineering tests)

We can calculate the cost charged to in-house manufacturing department simply by applying per unit overhead rate to the activity specification.

Total cost for the market analysis charged to in-house manufacturing department

= Per hour cost * total allocated hours for market analysis

= 70 * 1800

= 126000 dollars

Total cost for the Product Design charged to in-house manufacturing department

= Per design ...