During the last decades there was a change in organisations from managing vertical to managing horizontal. The organisations started to become process orientated instead of function orientated, and new management styles, like total quality management, just in time, benchmarking, or business process reengineering appeared. Which lead into an increase of overheads.
(Drury 2004a) The most important cost factors changed from direct costs like labour costs or materials, into indirect costs like set-up costs or administration costs. Therefore the traditional costing systems became more or less useless, because they presented poor cost information, which leads into decision errors.
Therefore the ABC- system of cost calculation seems to be a solution. The most important difference between traditional systems, and the ABC system, is the breakdown of overheads. In traditional costing systems, they are divided into cost centres, and accumulated products by using direct cost drivers. In the ABC system, they will be assigned to activities, which creates a greater number of cost centres with different cost drivers. They will be accumulated to products in the percentage of usage of an activity.
In this paper the ABC-system of cost calcualton is discussed and how it can be inplemented successfully within an organisation. Attention is also trwon to the most important failure in implementation of an ABC-approach, which should be avoided. To establish an ABC-approach within an organisation more than just a new calculation system is needed. An ABC-approach has to be implemented in the management system (ABM) and in the budgetting process (ABB). All in all, Activity based costing is much more than juast a costing tool. Successfully implemented it will help to understand costs better, an make the right decisions.
Contents
2 Introduction
3 Designing ABC systems
3.1 Identifying activities
3.2 Assigning costs to activity cost centres
3.3 Selecting appropriate cost drivers
3.3.1 Transaction Drivers
3.3.2 Duration Drivers
3.3.3 Intensity Drivers
3.4 Assigning the cost of the activities to products
4 Strategic benefit of ABC approach
4.1 Activity based costing (ABC)
4.2 Activity based management (ABM)
4.3 Activity based budgeting (ABB)
5 Failure in implementation
5.1 Resistance
5.2 A high degree of inherent difficulty in implementation
5.3 The threat of redundancy
5.4 Expertise not held by the company
5.5 Data-collection problems
6 Conclusion
Objectives and Core Themes
This paper examines Activity Based Costing (ABC) as a modern solution to the limitations of traditional cost accounting systems in an era of changing organizational structures. It aims to explain the transition from function-oriented to process-oriented management and how ABC facilitates more accurate cost information for decision-making.
- Methodology for designing and implementing ABC systems
- Selection and application of various cost drivers
- Strategic advantages of ABC, ABM, and ABB
- Common pitfalls and implementation challenges
- Distinction between value-added and non-value-added activities
Excerpt from the Book
3.1 Identifying activities
To identify the activities can be seen as the most important, and also most difficult stage in creating an ABC approach. Therefore it is very important, to carry out this stage very carefully. Activities consist of different tasks, which can be added together. Certainly each task can be seen as one activity, but this would create a too high amount of data. To cursorily activities will not be able to present usable cost information. So it is important to find the right size
Activities can be carried out by activity analysis. As a useful starting point can be seen a plan of the workplace, and a payroll listing, to identify how all work space is used, and which personnel is taken into account. Afterwards the managers and employees must be interviewed to identify which tasks they carry out, and how they can be summed up to certain activities. The most important factor in summing up different tasks to one activity is a single cost driver, to be able to assign the costs caused by this activity to different products.
Summary of Chapters
Introduction: Describes the shift from vertical to horizontal management and why traditional costing systems are no longer sufficient.
Designing ABC systems: Outlines the four-stage process required to build an ABC system, focusing on identifying activities and cost drivers.
Strategic benefit of ABC approach: Details how ABC, ABM, and ABB provide strategic value for costing, pricing, and operational management.
Failure in implementation: Discusses five common negative features that can lead to the failure of an ABC project, such as resistance and data collection problems.
Conclusion: Summarizes that ABC is a powerful management tool that requires total organizational commitment to be successful.
Keywords
Activity Based Costing, ABC, Activity Based Management, ABM, Activity Based Budgeting, ABB, Cost Drivers, Overhead Costs, Process Orientation, Resource Consumption, Implementation, Management Accounting, Cost Accounting, Value Added Activities.
Frequently Asked Questions
What is the primary focus of this assignment?
The paper explores the implementation and strategic application of Activity Based Costing as an alternative to traditional, outdated cost accounting methods.
What are the core thematic areas discussed?
The work covers system design, the selection of cost drivers, the strategic benefits of ABC, and the common reasons for implementation failure.
What is the research goal of this paper?
The goal is to demonstrate how organizations can improve decision-making by correctly identifying activities and assigning costs accurately to products or services.
Which scientific methodology is used?
The author uses a literature-based analytical approach to synthesize concepts regarding overhead cost breakdown and activity management.
What topics are covered in the main section?
The main sections explain the technical process of designing an ABC system, the specific use of transaction, duration, and intensity drivers, and the transition into ABM and ABB.
How are the keywords defined for this study?
The keywords focus on the terminology of modern cost management, specifically addressing the cost-driver-based allocation of indirect expenses.
Why are duration drivers considered more accurate than transaction drivers?
Duration drivers account for the actual time spent on an activity, whereas transaction drivers assume uniform resource consumption, which can lead to over- or undercosting.
What is the difference between value-added and non-value-added activities?
Value-added activities contribute to the product's value in the eyes of the customer, while non-value-added activities (like setup times) represent potential areas for cost reduction.
Why is organizational resistance a major risk?
Without support from both management and staff, the data collection process becomes unreliable, which undermines the entire costing model.
- Quote paper
- DI (FH) Andreas Leitner (Author), 2004, Activity Based Costing, Munich, GRIN Verlag, https://www.grin.com/document/38564
