Allocation of Fixed Costs

Allocation of Fixed Costs

Part I

Activity Based Costing

The methodology of Activity Based Costing (Activity Based Costing) is based on the fact that a company that produces products or services needs to perform activities which consumes resources, so activities are funded first and then the cost of activities are assigned to different cost objects (products, services, customer groups and regions, processes, etc.). Consuming such activities, in such a way we achieve a much greater accuracy in determining the costs and the correlative profitability (Leitner, 2007). In an economy under globalization, the correct calculation of costs, for the purposes of control and subsequent reduction, is essential for the purpose of competing effectively with suppliers in other parts of the planet. This addition is also essential when generating valid strategies for the internal market.

Difference from other Allocation Methods

First, it overcomes organizational barriers in areas or sectors, to give prominence to the processes.

Second, it helps to identify those activities and processes do not generate value for the customer or the company, and thus help their elimination.

Third it focuses more attention on eliminating unnecessary activities, which in reducing the costs of activities.

Fourth, it allows competitive pricing for their products and / or services on the market.

Fifth, it avoids surplus fund activities other character deficits.

The company must do what the do better than their competitors," and it is therefore necessary to have a good system for calculating costs. Controlling costs through the residual analysis and performance evaluation of managers, and support the decision-making is the main objective. It participates in making strategic decisions, tactical and operational, helping to coordinate the effects throughout the organization (Leitner, 2007).

It provides information required for operations planning , evaluation and control, safeguarding the assets of the organization and establishing communications with stakeholders outside the company .

Characteristics of ABC

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

The inability to report the costs of individual products at a reasonable level of accuracy.

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

Traditional systems based cost the process of "costing" in the product. Costs refer to the product because it assumes 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 invested ...