ACTIVITY BASED COSTING

Activity Based Costing, Budgeting and Management

Activity Based Costing, Budgeting and Management

Introduction

The Activity-based Costing also called ABC method is very famous and well known management system of accounting that have emerged in past two decades. The ABC method was developed in the United-States during the early 1980's by single manufacturing firms and it seems to offer more consistent information. This method of accounting includes all the fundamental factors that arise during carrying out of any activity or fulfilling any purpose of activity. This accounting method concerns the processes of collecting, analysing, summarising and assessing a variety of choices of actions that can be under taken. It involves all the costs and the management processes that can be adopted based of appropriateness and efficiency of costs and capability of the management. It also considers collection, classifying and recording. All these management of accounting of financial costs has impact on the economic factor of production.

Costs of the production and the management activities are of important concerns for the business organizations. The cost control is the aim of the organizations for the increase in profitability and other opportunities. The affects of cost control has direct impact on the profits. It is important to know the efficiency of cost of products and services for effective decision making.

Developments in costing techniques

Activity based costing techniques has been continuously developed with the passage of time since the concept has been emerged. The costing budgeting and management methods have been changing over time aiming to answer the critical question and problems of the managers that arises.

Activity-based costing seems to be an appropriate method for the managers to allocate costs to the products that are used by the customers. But the real case studies have shown that ABC method loses control in large scale business operations and it becomes more difficult to implement and continue. 

The concepts given by Johnson and Kaplan (1987) in the “Relevance Lost” of Management Accounting have given the dynamic area to activity based costing. Johnson and Kaplan (1967) argued that there must be 4 key functions that must be accomplished by an adequate costing system. These includes provision of information for developing financial statements, managerial control authority, short and long term costs of the products and relevant data for specific studies. The unavailability of these functions has given rise to other concepts in traditional activity based costing.

The majority of accounting management systems had further developments that are made based on the Strategic Management Accounting (SMA) concepts. The historical research done by Johnson and Kaplan shows that the context of activity based costing has risen from them. According to Johnson and Kaplan, the management accounting methods should analyze in detail about the processes and activities of the organization and it should link together the organizations strategic and the operational management. The theory developed by (Johnson & Kaplan 1987) criticized the traditional costing methods and their conservative approach gave rise to strategic management and since 1980s there has been a rising attention in strategic management ...