ABC COSTING SYSTEM

ABC Costing System



ABC Costing System

Activity Based Costing (ABC) System serves as an alternate to the company's usual costing system. It provides manager with a helpful tool that aids in making strategic decisions and controls the fixed costs. ABC costing system is especially helpful for decision making that directly affects the capacity of production of a company. In traditional costing systems, the basic aim is to value the inventories and cost of goods sold in accordance with the GAPP (Generally Accepted Accounting Principles) whereas in ABC costing system there are two primary cost systems involved. These systems report accounting based data to internal and external authorities. It is also used to determine the costs for product for special management reports. The method was founded in 1972 and is basically aimed at improving the traditional costing methods to provide better decision making alternatives to corporations (Aiyathurai, 1991).

In activity based costing systems, all costs whether manufacturing or non-manufacturing are considered. A number of overhead costs are taken into consideration using its own activities. However as compared to traditional costing systems, ABC system offers better and different allocation bases. The rates of overhead are based on the level of activity at capacity. This is also a contrary application to other methods since the other methods use budgeted level of activity. Most successful distributors in the electrical industry keep their costs in constant vigilance so that they may not deviate. However these distributors lack the capacity to maintain an adequate level of their indirect costs so that it does not produce any mistakes in pricing the product based on the costs incurred. It is difficult to gauge each activity of a product development process without taking into consideration, all details entailed within the life cycle of the product. Sales, logistics, and other administrative processes are quite expensive to repeat over and over gain so the company, taking help from ABC costing systems, can easily perform such jobs of recounting components. This also results in a benefit of a fair price for the product. All the manufacturing and non-manufacturing costs make the perfect combination for an ABC costing system. This way companies are able to take informed decisions rather than compromising on intuition or unclear market trends. (See Appendix).

Activity-based costing (ABC) can determine the true cost of products and services by assigning costs based on services performed by distributor resources. This improves overall performance and results in efficiency. ABC can hence provide important contributions in the business processes and helps identify the loopholes within it. The drivers of performance and costing in the system can also be distinguished based on their overall share within each product's development procedure. Businesses acquire important feedback through optimal productivity level. Hence each activity of the organization falls in place and becomes coherent with the mission of the business. Distributors look for proper costing mechanisms with the primary aim of achieving optimal productivity levels and to compete in the market in such times, they have to be proactive ...