A report on Activity Based Costing Approach

a ) Activity-based costing ( ABC ) is a bing attack that assigns activity costs to be objects on the footing on cost driver use. Costss are assigned to each major activity instead than sections and step the resources consumed by cost objects more accurately.

B ) Absorption bing absorbed all operating expenses into the cost of production. WWonka plc ‘s budged and selling distribution cost and entire list monetary value is ?990,000 and ?9,000,000 severally. Therefore, the soaking up rate is 11 % ( ?990,000/?9,000,000 ) .

Planing an activity-based costing system involves four stairss: ( 1 ) placing the major activities and resource costs, ( 2 ) assignment costs to each activity, ( 3 ) find the cost driver for each activity, and ( 4 ) delegating the cost of activities to be objects.

degree Celsius ) To: Management of WWonka PLC

Report on activity-based costing attack

In the 1980s, more and more houses adopted activity-based costing to replace the volume-based costing system. The volume-based system merely takes history of direct costs and uses an overhead rate that may over-cost or under-cost the merchandise. By implementing ABC, it shows the consequence of differences in activities and alterations in costs. It merely charges for resources consumed and generates the most accurate costs.

Firms are benefited greatly by the acceptance of activity-based costing attack. ABC assigns cost more suitably and instructively so that company could accomplish better measurings on merchandise and client profitableness. This provides information to the company for doing better strategic determinations such as pricing and gives the company a cost advantage over rivals. Besides, ABC measures the activity-driving costs more accurately. This helps the troughs identify the value-added and non-value-added activities which enables the company to further value enhancement undertakings and procedure value by doing better determinations. Besides, ABC draws director ‘s attending on those inefficiencies so that betterments can be made and allocate resources to the most good merchandise. In add-on, the betterment on cost decrease causes better cost appraisal for planning and budgeting. ABC can used to supervise costs every bit good. By comparing the costs and doing accommodation, this helps the house to command the cost tendencies. Furthermore, ABC can be used as a benchmark to compare the public presentation with similar houses and do betterment. Furthermore, ABC bing helps to place and command the cost of underutilization of capacity. Generally, many workss have extra capacity in off seasons. The ABC system helps to pull off capacity degree of houses to cut down the cost of fresh capacity and set the monetary value suitably.

Although ABC brings many benefits to the houses, there are some restrictions that need to aware. First, WWonka plc is presently utilizing soaking up costing, put ining a new ABC system is dearly-won and time-consuming. The cost may outweigh the benefits bring to the company. Second, companies do non hold big figure of merchandises have small benefit from ABC. As WWonka has merely two types of orders, ABC attack is non that worthwhile. Third, some concern prolonging costs such as belongings revenue enhancement and mill insurance require allotments to sections and based on volume steps. These costs are hard to delegate and necessitate to utilize the volume-based cost driver. Fourthly, some costs such as advertisement disbursals, research and development are omitted in ABC system because the Generally Accepted Accounting Principles regard these costs as period costs.

ABC system provides elaborate information to directors for decision-making. By activity analysis, cost can be reduced in four ways: activity riddance, activity choice, activity sharing and activity decrease.

First, the directors need to place the high-value-added and low-valued-added activities and merely maintain those that add value. In WWonka, wadding is a low-valued-added activity as it will non diminish clients ‘ satisfaction much if eliminated. On the other manus, bringing is a high-valued-added activity as it increases significantly the value of the merchandise to clients.

The above pie charts show the per centum cost of activities in order A and B. From the informations in portion B, the merchandising and distribution operating expenses are a‚¤101.88 for order A and a‚¤182.48 for B. The list monetary value of order B is a‚¤400 lower than order A, directors could set the list monetary value of order B somewhat in order to do order B more profitable. Besides, from the charts, we can see that the wadding costs occupy rather a big part of the entire operating expenses in both order A and B. As wadding is a comparatively low-value-added activity, WWonka could take down the wadding cost for illustration by utilizing cheaper or recycled wrapping stuff and go more environmentally friendly. Furthermore, WWonka could buy larger bringing vehicles which can transport more bundles in one clip. This could cut down the clip of going back to the house and shortens the bringing clip. Furthermore, in order B, the specific bringing distance is 48 stat mis which is about 5 times of order A ( 10 stat mis ) , it might be inefficient if present both A and B together by utilizing the same vehicle. WWonka could present order A & A ; B individually in order to use the bringing vehicles more expeditiously. In add-on, the other operating expenses contribute a high part of the operating expenses every bit good. These cost may deduce from reviews, blessings and rework. These activities can be eliminated by quality confidence methods such as ISO 9000 and entire quality direction. These can keep the quality of cocoas and some of the costs can be eliminated or reduced. Finally, WWonka can better public presentation and cut costs by concern procedure reengineering, the reengineering squads can utilize the informations in portion B and reengineer the procedure and do betterments in every facets.

Through activity-based direction, directors can better efficiency and effectivity of the organisation and increase profitableness and fight.

vitamin D ) Activity-based bing brings many benefits to the company. However, it is non the optimum costing system for every organisation. Generally, ABC is effectual for organisations that have intensive competition, diverse scope of merchandises, operating expenses are the chief cost of the merchandise and high handiness of information aggregation processs and resources.

For individual merchandise houses, all costs are attributed to the individual merchandise straight, the operating expenses consumed by each merchandise are comparatively similar or equal and will merely creates small deformation of costs when utilizing volume-based-costing system. It is non worthwhile to run ABC. However, when there is a high diverseness of merchandises, ABC calculates the costs more accurately than volume-based costing. In a merchandise mix company, every single merchandise has different parts in ingestion of operating expenses because of different merchandise size, complexness, setup clip and procedure. Each single merchandise ‘s usage of resources differs from the usage of volume-based cost drivers so that it can non mensurate by the volume-based-costing systems. Otherwise, it may hold cost deformation and cause important errors in determination. Hence, ABC is effectual for merchandise mix instead than individual merchandise house. Besides, cost construction is a standard to make up one’s mind the effectivity of a costing system. ABC will be most effectual when operating expenses have a important part of entire cost and big portion of the costs is non related to production volume straight. For illustration, in an accounting house, supplying professional services to clients is the chief occupation of the company. Wages are the largest cost while indirect costs merely constitute a low proportion of the entire costs. In this instance, labor costs are the bulk of the entire cost and ABC is less preferable as the costs could be traced easy. In contrast, a fabrication house will hold wholly different cost construction. The indirect operating expenses have a high proportion of the entire costs. For these types of houses, ABC is more effectual because the volume-based costing system causes inaccuracies in delegating costs and has negative impact on the company. Furthermore, the handiness of information aggregation processs and resources is one of the factors as good. In order to run a sophisticated ABC system, it needs plentifulness of financess and clip. Therefore, companies need to hold sufficient resources such as capital and professional technicians to run ABC. Furthermore, companies need to make research to construct up a set of singular processs for the system. If a company does non hold proper processs to roll up information that the system needs, it would non work decently and direction can non do the best determination and betterment for the house suitably. Therefore, insufficient of information can non ease an first-class activity-based costing system. The more information the company collects, the easier to put up the system and run more efficaciously. However, on the other manus, ABC system will non work successfully if the company does non hold sufficient information in puting up the processs. Hence, handiness of information is of import to impact the effectivity of ABC. To sum up, high handiness of information aggregation processs and resources would ease an effectual ABC and frailty versa.

In decision, activity-based costing system reduces deformation of costs and outputs information for direction to steer decision-making. Therefore, although implementing and ABC system is clip devouring and expensive, it is still worthwhile to run as the benefits from ABC normally exceeds the cost of put ining the system.