Implementing Activity Based Costing

Implementing Activity Based Costing - Implementing Activity...

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Implementing Activity Based Costing
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mplementing Activity Based Costing This paper discusses how Lavish Lamps could implement and activity based costing system as well as how this system could benefit the company strategically.
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Our previous discussion on the activity based costing system has spurred me to do some further research into the subject. As I began my research I came across an article titled An Application of Activity Based Costing in the Air Conditioner Manufacturing Industry by Heather Nachtmann and Mohammad Hani Al-Rafi. This article discussed how an air conditioner manufacturer named Airco has successfully implemented the activity based costing system. After reading this article I began to think how the activity based costing system could benefit our company as well as how we could implement the system. To briefly review, activity based costing is a costing method that allocates costs to the products and or services that uses the resources associated with the costs. Many use this costing method as a tool for planning and controlling costs. Activity based costing was originally developed to address the problems that are often associated with traditional costing methods. Traditional costing methods often lack the capacity to determine actual production or service costs which often lead to a lack of useful information when making operating decisions. With the inaccuracies of the more traditional costing methods managers could be making decisions that are based on inaccurate or inefficient data (Activity- Based Costing, n.d.). Lavish Lamps could definitely benefit strategically by implementing activity based costing. Activity based costing would allow management to allocate costs to products and activities more efficiently than with a traditional costing method. This method also would allow costs to be identified and allocated on to the user of that resource only when the product used that particular activity. Not only would activity based costing allow management to more efficiently allocate costs it would afford an improved way of identifying high overhead costs per unit. Once these costs were identified management could better find a way to reduce the costs (Activity-Based Costing, n.d.). Before Lavish Lamps can implement activity based costing the company must gain the support of management. Implementing activity based costing is a time consuming task that will take the full
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participation of management. Management must understand how activity based costing could improve business as well as why it is important to the company. Once management is on board then the process of collecting data must begin. Before an activity based costing system can be implemented key activities and cost pools will
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This note was uploaded on 06/01/2010 for the course ACCT 624 taught by Professor Krisbrand during the Spring '10 term at Colorado Technical University.

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Implementing Activity Based Costing - Implementing Activity...

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