ACTIVITY BASED COSTING

Activity Based Costing

Table of Contents

CHAPTER 1: INTRODUCTION3

Introduction3

Aims and Objectives3

Significance3

Research Questions4

CHAPTER 2: LITERATURE REVIEW5

CHAPTER 3: METHODOLOGY8

References10

Activity Based Costing

CHAPTER 1: INTRODUCTION

Introduction

Activity-Based Costing (ABC) is one of several modern management accounting tools a company can use if it wants to obtain improved control of the increasing books, articles and working papers have been written - not to forget the number of courses, conferences, seminars and presentations about the subject. The authors are also well-known, i.e. Robert S. Kaplan and Robin Cooper, even though several other academics have had a great influence on the development of ABC, e.g. Skinner (1974), Miller & Vollman (1985). Now ABC seems to be a ready-made costing system, marketed by consultants and computer software companies around the world.

Aims and Objectives

The main aim of this study is to highlight the benefits and importance of activity based system.

It will direct many companies to apply this sytem when they find it beneficial for their businesses.

Significance

The study of the Activity based costing would highlight the significance and importance of this sytem. The study will help companies to incorporate the system in their business to enhance their efficiencies.

Research Questions

Is the activity based costing system is better that the traditional costing systems?

Will this system be implemented by most of the companies in near future?

CHAPTER 2: LITERATURE REVIEW

The concept of ABC started in the mid-1980s in the USA as a consequence of heavy criticism of the methods which were used at that time in the USA. The development of ABC was to a wide extent encouraged by three Harvard cases; Schrader Bellows case made by Kaplan's junior Harvard colleague Robin Cooper, The John Deere case made by Kaplan himself and The Weyerhaeuses case made by Tom Johnson from Portland State University. In short, Kaplan had observed four problems: i) the lack of good practical examples - the same as had happened to the Japanese, ii) an IT system which contained only traditional cost models, iii) excessive emphasis on the principles of financial accounting and finally iv) lack of focus, improvement, relevance and response of management accounting (Kaplan, 2001, pp. 130).

The main problem was the increasingly big share of indirect costs from partly the production area through high-tech production equipment, such as numerically controlled machines and robots and partly through an increasingly big number of support departments such as IT, design, maintenance, sales and administration (Lillis, 2008, pp. 25). Finally, various modern control philosophies such as Just-in-Time and MRP were also causing an increase in the indirect costs. These problems were not specific for the USA but since the USA had so far used relatively simplified methods to handle cost allocations for cost control, it became particularly apparent here. At the same time, USA experienced major problems in the entire production area and in the global competitiveness - particularly when compared to Japan (Searcy, 2004, pp. 60).

Another widely used concept is the American 'absorption costing method'. This method has been criticized because costs are divided more or less arbitrarily via allocation which to a ...