Last Updated 20 Jun 2022

Benefit of changing to Activity Based costing system

Category Bank
Words 1093 (4 pages)
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Activity-Based Costing has been of great help to the companies and other forms of businesses. With the help of ABC, the organizations have been able to implement strategies to overcome various problems facing the welfare of their businesses and other activities in the organizations. The organizations have been able to assign cost of each activity to the products and services that are offered by a particular organization. This is done for the sole purpose of elimination of high prices to some products and due to lack or low profits in other products or services.

The ABC rule is used as a tool by businesses to assign the cost of the business activities to the goods and services (organization products) offered by the business to its customers. It is used as a tool that understands the customers and the product cost and the overall profitability. It is also used to in supporting the decision making process as would be used in product pricing, marketing, identification and a way to measure the initiative of improvements.

Introduction

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The Activity-Based Costing (ABC) is a method used by accountants that can allow the business to collect data in regard to their operations costs. Their operations cost is then assigned to specific activities that include planning, production and other organization activities and then they are associated with the variety of products and services. This enables the company to know what products and services have increasing profits and which have increased losses, this help in learning the flow of each product and service within the company.

The use of ABC method help the concerned personnel in the company to prepare an effective data that will aid in preparing budget that will bring a greater achievements in the company and enable the company to have an effective plan for the expense that will keep the company running smoothly for a given period of time. ABC method is mostly effective and is much recommended for a longer period of time over the short term as opposed by the theory of constraints.

Research Objectives

The objectives of this research are:

  • To determine the effectiveness of ABC
  • To investigate how companies implement the ABC in their activities
  • To compare the excellence of companies that use ABC and those that don’t use ABCTo determine the advantages and disadvantages of ABC

Literature review

The activity-based costing got first implementation in the 1980s. It was a formed as an alternative to replace the traditional way of cost management systems that was not effective in producing favorable results when allocating the costs. The implementation of the system was advocated by Professor Robert Kaplan of Harvard business school.

It was initially used for private business though it has currently gained usage by even the public forums like those used to measure the efficiency of the governance. The ABC programs require proper planning and great commitment from the highest management. It is recommendable to start up with trials in the organization. These trials may be done with the departments that are not performing well as it would be expected of them. This would be a great chance to show that the ABC is an effective system that would save money for the company with great achievements.

On the other hand, if the company des not save money on this, either the system process was not well implemented or may not be effective for the company. (Gary, 1998) According to the study, the business should first set up a team that will master the progress of the product and which activity would be appropriate for the product and service. The team should include all persons from the different departments of the company. After the formation of the team and putting in place all the required materials, the activities that cost money are determined. (Cokins, 1999 and David 1991)

At this point, great attention is paid for details on each activity are required, most of the costs might be hidden and may bring in controversy thereafter for the may not be obvious initially. Even though there might be some replacement to human labor, it’s still important to determine the fixed cost of a product or service. (Cokins, 2000) Even though this method is important to the business, it has some risks. The companies that use the ABC system, the risk using too much time and money while trying to implement the system and collecting data, going through it and in implementations.

Lack of detailed data can lead to frustrations of the managers and can on the other hand contribute to the down fall of the system. Mistake done on the data collection can lead to downfall again if not noticed before implementation. (Joyce, 1999) Through the implementation of the activity-based costing, the employees are able to understand the different costs that are involved in different activities. This enables them to analyze and identify the activities that add value to the product and those that do not, it helps them improve on value and benefits are realized.

In the DHL Company, the employees are involved in collecting data and views from the clients; this enables them to involve themselves in quality improvement of their services and eliminate the non profitable activities that enable the overall company’s efficiency. (Henricks, 1999) The ABC system has helped the DHL Company to answer the market need in providing quality service at a better and competitive price. This system has helped the company’s top management in the decision-making process. (Hicks, 1998) This has helped the company to reduce the price of their services without a decline in value of their services.

(Hicks, 1999) The benefits of the ABC system are now in use in most institutions that include the government departments and the public financial institutions. The Barclays bank New York changed its accounting method to provide accurate and cost effective data. Through the change to ABC, the Barclays bank has particularly found it helpful compared to the former funding based accounting systems that was designed for ensuring legal compliance. (Paulo, 1998) In the use of ABC, the managers are able to direct funds where they are more beneficial.

They are able to learn the weaker points in the organization making it easy for them to implement the most beneficial activity in the business. (Robert, 2004) The managers in Barclays bank found that ordinary accounts were not doing much well compared to loans, they campaigned for people to take more loans at simpler rates and prolonged repayments period, and this increased to Banks profits than ever. The bank is launching new loan strategies that are expected to double the profits. (Robert and Bruns, 1987)

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