Fifth edition Alnoor Bhimani Charles T. Horngren Srikant M. Datar Madhav V. Rajan Farah Ahamed
Activity-based costing (ABC) systems
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| Activity-based costing (ABC) systems Consider asking students to write a short essay on the costs and benefits of ABC. What changes in the business environment made ABC more attractive today than in the past ABC is most likely to yield benefits fora company with (1) many products that consume different amounts of resources (if there is only one product or if all products consume resources similarly, then broad-based averages from traditional systems are sufficient, (2) operations that are varied and complex (otherwise, just a few indirect-cost pools would suffice, (3) a highly competitive environment where knowledge of costs and cost control is critical and (4) access to accounting and information systems expertise to implement and maintain the system. ABC is increasing in popularity because changes in business are decreasing implementation costs while increasing the relative benefits (i.e. companies are producing a wider variety of products using more complex operations in a more competitive environment. Accountants may need to reevaluate the cost system if it yields numbers that are counter- intuitive to operating and marketing managers or if costs/prices appear to be out of line with those of the competition. Companies that have successfully implemented ABC usually limit the number of activity/cost pool/allocation bases to 5–10 per department, at least in the initial implementation. More activities can be added later, if additional complexity is warranted. The danger with identifying Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5 th Edition, Instructor’s Manual © Pearson Education Limited 2012 too many activities is that the company may get bogged down in a morass of detail and the implementation may fail. ABC can help managers control costs in two ways. First, employees can try to reduce consumption of the allocation base. Second, ABC can provide incentives to reduce the indirect cost allocation rate for each activity (because the cost of each activity is now visible. A manager can be rewarded for reducing the indirect-cost rate for an activity because the accounting system visibly links the manager to this cost reduction. (Ina single MOH cost pool system, managers have little incentive to reduce MOH. The effects of any reduction are not linked to a particular manager, if all the MOH is aggregated in one pool) Download 1.72 Mb. Share with your friends:
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