MCFAR ASSIGNMENT

MCFAR Assignment

Abstract

This paper covers the introduction of the traditional based and activity based costing and their merits and de merits for the manufacturing businesses. It will help to recognize the value and limitations of both costing methods and under the light of the discussion firms can choose which method is better for them to adopt. No method is perfect enough for all the firms to adopt so is the case with Activity Based Costing method. The paper further highlights the critical discussion of the researchers over the ABC method.

Activity Based Costing

Introduction

Researchers have traditionally been interested in the management accounting processes of large manufacturing companies' accounting systems. Many researchers have conducted studies in non profit seeking, public sector organizations. Other than non profit sector; very few researchers have evaluated the management accounting practices of profit seeking organizations.

Companies focus on paying attention towards their revenue growth without understanding that the business is generating profitable growth or not. Many companies have fallen victim by adopting this practice. Companies give exclusive incentives to their sales force on revenue generating goals without recognizing that whether those deals are profitable or not. Now the companies, who can think forward, started realizing that not every customer is a profitable for them. Customers, who frequently buy products and return them back, give companies a burden of high cost to serve (Popesko, B and Novak, P, pp 1-3).

Technological innovation and global competition have changed the business environment a lot. This change forces the organizations to use the innovative tools for the financial and non financial information of the organizations. The new change in the business environment demands the organizations to gather the relevant data and information about the customers, costs, procedures, services, products and activities. Firms typically use their cost system to (Kaplan & Cooper ,1992, pp8-14).

Design product mix and investment decision;

Help employees to learn and improve their activities;

Create such products and services that meet with customer expectation resulting in profits;

Negotiate about quality, product, features, price, service and delivery with customer;

Proficient and effective processes, which include services and distribution, to customer segment and targeted market (Cardos, I.R, Pete, S, p 154).

Still, the firms are not gaining what they could gain from cost system. They are still with the frame of mind for local competition rather than the global competition. The reason behind is that they rely on less technological and simpler designed cost systems. These systems cannot help managers to move towards the betterment of their activities, and they do not have actual facts and figures to implement their strategic assessments about services, processes, products and customers.

Question 2

Absorption Costing, Purpose and Value

Absorption costing is widely recognized as full absorption costing. It is a managerial accounting costing process which involves the expensing out of all costs related to the specific product manufacturing (Cokins, G, pp 76-78). This method uses the overhead costs and the total direct costs which involves in the product manufacturing as the cost base. The traditional cost allocation system is based on 3 basic ...