Research Proposal Brief

Statement of the Problem

“Implementation & Critical Analysis of Absorption Costing vs. Activity Based Costing”

The purpose of this paper is to provide a critical analysis on the traditional absorption costing and Activity Based Costing (ABC). Businesses who are involved in manufacturing processes use a costing technique in order to identify the costs incurred as result of production. Businesses then allocate the costs to the products in the hope to recover the costs when selling those products. However, implementation of new costing techniques is carried out in business arena, which is helping manufacturing units in achieving cost reductions and accuracy. The competition is increasing in the markets and businesses needed to stay up-to-date with costing and other techniques in order to keep up with the competition and remain profitable and efficient.

Absorption costing is a traditional technique, which is becoming irrelevant with current accounting practices and cost allocation and businesses are diversifying themselves, thus their operations are increasing along with cost and profit centres. The importance of the research is to analyse critically those factors, which have lead to implementation of Activity Based costing and how much success it had gained over the years. This study will also encapsulate the benefits, which are incurred by the implementation of Activity Based Costing in organizations where conventional accounting procedures are being adopted. Business preference analysis will also be carried out because of the company and the benefits, which they have accrued, with the use of Activity Based Costing.

Literature review

At the start of 1980's companies started realizing the adverse consequences of allowing traditional costing systems which are generation in accurate information regarding costs. The costs structures were radically changing. The overheads cost were increasing due to the increase intricacies due to increasing the product offering, reaching out to other customers and development in ...