PERFORMANCE MEASUREMENT AND CONTROL

Performance Measurement and Control



Table of Contents

Introduction1

Application of ABC Costing2

Principles of ABC Costing4

Calculation Formula of ABC Costing5

Benefits of ABC Costing8

Conclusion10

Performance Measurement and Control

Introduction

Under the traditional distribution technology of indirect costs, are made ??apportionments of costs of service centers to production centers, but the costs accrued 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.The methodology of Activity Based Costing (Activity Based Costing) is based on the fact that a company to produce products or services, they need to carry out activities which consume resources, so that activities are funded first and then the cost of activities are assigned to different cost objects (products, services, customer groups and regions, processes, etc) claiming such activities, in such a way company achieves a much greater accuracy in the determination of costs and corresponding profitability. (Cooper, 1992, pp.1-13)

The ABC was created as a method to solve a problem that occurs in most organizations using traditional costing system, consisting in this:

1. The failure to report individual product costs at a reasonable level of accuracy.

2. The inability to provide useful feedback to the administration of the company for the purposes of operational control.

In such circumstances, managers of companies that sell a variety of products and services make crucial decisions for the progress of the organization, such as pricing, product composition and process technology to implement, based on information notoriously inaccurate and inappropriate costs. Costs refer to the product because it is assumed that each element of the product consumes resources in proportion to the volume produced. Therefore, the volume of product attributes, such as the number of hours of direct labor, machine hours, amount spent on materials, are used as "addresses" for allocating indirect costs. These routers volume, however, do not take into account the diversity of products in the form of size or complexity.There also exists a direct relationship between the volume of production and consumption costs. Unlike the foregoing, the Activity Based Costing process costing based on activities, which implies that the costs of activities are traced to products, relying on the demand for products for these activities during production.Therefore, attributes of activities, such as hours of preparation time, or times involved, are used as "routers" to allocate indirect costs. As the number of increments measured activity used, the ABC can better capture the economic factors underlying the operation of the company, which allows for more accurate product costs. (Daly, 2002, pp.41-55)

Application of ABC Costing

Many managers understand intuitively that their accounting systems distort product costs, and make informal adjustments to compensate. However, few managers can predict the magnitude and impact of the adjustments that should be done. It identified three separate but simultaneous factors as the main reasons that justify the need and practice of ABC:

1. The process of cost structure has changed ...