Activity Based Costing project

Activity Based Costing project - Activity Based Costing...

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Activity Based Costing: Introduction The business environment focuses on making healthy investments and earning sizeable profits. Several companies in the same industry or even suppliers who provide heterogeneous products allow customers the opportunity to select from an immeasurable variety. Hence, those companies have to strive for recognition, remain spirited and match their competitors’ offers. Because competition is the driving force in business, it hinders companies’ growth and profit making abilities. Nevertheless, companies can overcome this obstacle by controlling or minimizing costs. However, if a company wants to lessen cost, it has to understand the cause and effect relationship between cost and its activities. A person must know how certain products and their expenses are setup up to contribute to the overall expenses in operation of a bank for an example. That is true because the activities which drive the salaries expense would not drive the utility expense. The more exact a company is, the better off they will be in terms of quality and reliability. Cost Accounting was first developed in the early 1800s. According to Eldenburg and Wolcott, Cost Accounting has been used to make decisions, to measure, monitor and motivate performance, to analyze the profitability of customers, and to coordinate transactions with suppliers extending traditional cost accounting beyond the walls of the organization (8-9. All other references to Leslie G. Eldenburg and Susan K. Wolcott’s Cost Management Measuring Monitoring, and Motivating Performance will be indicated by page reference to this text.). There are various costing methods used to cost goods and services. The two primary costing methods used today. One is Traditional Based Costing (TBC), which involves Job Costing and Process Costing and the other is Activity Based Costing (ABC). Either costing method could be used depending on the companies’ size and activities. Whilst companies seek to find profitable opportunities, Dyer states that the key to being profitable is through accuracy. He further adds that if the information regarding the cost of producing goods and or services is not accurate, job bids may be too high or too low. Consequently leading to overall losses in the company either way. (1)
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Limitations Even in activity-based costing, some overhead costs are difficult to assign to products and customers, such as the chief executive's salary. These costs are termed 'business sustaining' and are not assigned to products and customers because there is no meaningful method. This lump of unallocated overhead costs must nevertheless be met by contributions from each of the products, but it is not as large as the overhead costs before ABC is employed.h What is a cost object? According to Eldenburg and Wolcott, a cost object is a thing or activity for which we
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This note was uploaded on 02/20/2012 for the course H/A 121 taught by Professor Alamo during the Spring '12 term at Morgan.

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Activity Based Costing project - Activity Based Costing...

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