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Activity Based Costing (ABC)
This is an attempt to absorb overhead into product costs. In principle there is no significant difference between ABC and traditional absorption costing. In absorption costing, production overheads are divided between products on the basis of production time for each one rather than activities that take place during production. This allocation is, as already described, arbitrary and is not a reflection of costs incurred and can result in incorrect pricing of products.
Activity Based Costing (ABC) is an accounting technique that allows an organisation to determine the actual cost associated with each product produced without regard to the organisational structure
In order to achieve the major goals of business process improvement, process simplification and improvement, St Ives managers need to fully understand the cost, time, and quality of activities performed by employees or machines throughout an entire organisation. ABC methods will enable managers to cost out measurements to business simplification and process improvement.
Cheap Custom Essays on Activity Based Costing
ABC is a powerful tool for measuring business performance. It is a more accurate cost management system than traditional cost accounting; ABC identifies opportunities to improve business process effectiveness and efficiency by determining the true cost of a product or service. ABC principles are used to focus management attention on the total cost to produce a product or service and as the basis for full cost recovery.
A company cannot compete or compare until it knows how to cost. ABC is a cost accounting method that can provide definitions of processes, identify what the cost drivers of those processes are, and determine the unit costs of various products and services.
A major advantage of using ABC is that it minimises distortions in product costing that result from arbitrary allocations of indirect costs. Unlike more traditional costing methods that cannot be tied to specific outputs, ABC generates useful information on how money is being spent, if a department is being cost-effective, and how to benchmark for quality improvement.
Four Steps to ABC Implementation at St Ives
1. Identify activities, analysis of operating processes of each responsibility area. Each printing process may consist of one or more activities required by outputs.
. Assign resource costs to activities, refers to tracing costs to cost objects to determine why costs were incurred. Categorise costs in three ways
o Direct costs, traced directly to one output. (paper, ink, glue)
o Indirect costs, cannot be allocated to an individual output (maintenance costs for cutting machines, storage costs for the materials, quality standard assurance)
o General and Administrative costs, cannot be associated with any particular product (overhead).
. Identify outputs, all of the outputs for which activities are performed and resources consumed by an activity area. Outputs can be products, services or customers.
4. Assign activity costs to outputs, using activity drivers, assign activity costs to outputs based on individual consumption or demand for activities.
ABC will encourage St Ives managers to identify what activities are value added, those that will accomplish a mission, deliver service or meet customer demand. It improves operational efficiency and enhances decision making through better, more meaningful cost information.
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