Assignment on ABC in Manufacturing

Assignment on ABC in Manufacturing - ActivityBased Costing...

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Activity-Based Costing in Manufacturing Activity-based costing (ABC) has become one of today’s most popular methods of  costing by using activities to allocate indirect costs, such as overhead. Versions of  ABC originated as early as the 1920’s; however, advancements have been adopted in  modern business. Activity-based costing is an essential aspect of accurate, more  reliable cost information to produce true costs in representing financial data.  Applications, implementation procedures, and changes in ABC are illustrated as a  guide to better understanding ABC in manufacturing. APPLICATIONS Knowing the strategy behind activity-based costing is the first essential facet of this  guide to better understanding costs. An organization can create a better strategy and  corporate focus if the costs are better understood. Activity-based costing refines a  costing system by focusing on individual activities as the fundamental cost objects.  An activity is an “event, task, or unit of work with a specified purpose; for example,  designing products, setting up machines, operating machines, and distributing  products” (4, p. 141). Put simply, ABC is a systematic, cause and effect method of  assigning the cost of activities to products, services, customers, or any cost object (7).  Disregarding the definition of the method, ABC is an accounting tool that has  established a breakthrough role in the world of costing – applicable in retail or  manufacturing from sole proprietorships to large corporations. The entire idea of this method being activity-based has created a different perspective  in costing, one that produces more of a true cost. Many accountants and managers  believe that inventory cost figures give accurate product costs, which is not usually  the case (5). The true cost of a product is better calculated by tracing other costs, such  as overhead, to the manufacturing of the specific product, and it identifies any non- value added activities. Understanding the true cost of providing products and services  to customers is one of  the key elements of survival in a competitive environment (8).  Most companies need to be better informed of general costing to ensure a unified  approach to operations. From the implementation of ABC, Chrysler was convinced 
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This note was uploaded on 05/13/2010 for the course MECH 17657 taught by Professor Ravikant during the Spring '10 term at Indian Institute of Technology, Delhi.

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Assignment on ABC in Manufacturing - ActivityBased Costing...

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