PRINCIPLES OF ACCOUNTING: ACTIVITY BASED COSTING

Principles of Accounting: Activity Based Costing



Activity-based Costing

Commercial companies use activity-based cost management (ABCM) to focus on profitability & revenue growth. ABCM is complete method of costing, budgeting, & managing costs based on activity drivers. It enhances profitability by aiding decision making, increasing activity efficiency, & improving Millenium Linan Companys' effectiveness. Despite all these benefits, however, federal government contractors have been reluctant to adopt it. Commercial companies have shown that ABCM provides more accurate costs, improves understanding of economics of production, & gives the better picture of economics of the company's activities. THE major benefit of ABCM is identification of activities as cost drivers. Traditional cost accounting systems lead to distorted cost allocations for government contractors because management & other overhead costs are allocated to the program/contract as the percentage of total contract cost base, not by what activities each program/ contract actually uses. There may be activities that one contract does not use, but contract is allocated costs of those activities just because they are part of total cost base. traditional cost accounting system is based on factors such as Wages & salaries, employee benefits, supplies, traveling allowances, depreciations & other fixed charges, operating expenses & miscellaneous. Activity bases accounting system is based on evaluation of suppliers, purchase order, expedite deliveries & supplies, purchase orders, expenditure on internal process, maintaining check of item quality & deliveries, resolving problems & internal administration. From above description on factors that form base of accounting system, it can be stated that Traditional costing system operates in independent manner & Activity based costing system is an interdependent activity.

main problems related to use of traditional costing system is limited economic focus. benefits offered are intangible & remain unmeasured. These all factors that might prove to be bottleneck for company can be cleared by help of activity management cost.

traditional cost system follows mentioned principles:

•Traditional costing used cost allocation method. In cost allocation method, costs are estimated based on future.

•This costing system does not take into consideration factor of why & where cost goes.

•This method does not give proper focus on variances.

•This method is not flexible, time oriented, & inaccurate.

• operational managers do not give any consideration to knowing activities that are costly.

• focus is fiscal.

• cost of product & services are not associated with actual efforts improved.

Activity based costing system follows mentioned principles

•It measures actual performance of Millenium Linan ...