Activity-based costing is a method of managing accounting which focuses on the assignment of overhead costs in a more rational way when compared to the traditional method of assigning costs by the number of hours worked. This method is based on a system of assigning the costs initially to the related activities after that, assigning the cost associated with those activities to products that are only requiring the activities. Activity-based costing acknowledges the fact that machine setup as well as the testing that is required particular engineering causes the company to use up resources. This is the reason to the reason this method determines the price of these resources and assigns them to the items which require them (Accounting Coach 2004).
The environment of the manufacturing business shifts from manual to one that is computer-integrated, there is the appearance of cost systems with traditional structures which can release reports of deformed products. Thus, the use of activity-based costing can help solve this issue by gathering operational and financial performance by taking the task of tracing the most important processes of the business to the final product more efficiently. Activity-based costing can perform the following functions in cost control: identifying the centers of activity as well as identifying the initial costs drivers and analyzing the cost-related actions. Following this, there is a procedure of implementation to ensure proper utilization of the technique for the management of costs (Klener and No 1997).
Activity Based Costing can assist managers in their efforts to determine how they can maximize shareholder value as well as improve corporate governance overall. It began its work by bringing advantages over the traditional method of accounting. The traditional method of accounting there was a belief that huge volume of customers meant a an increase in profits. However, this isn’t the case when deciding using activity-based costing. ABC model was released with a revised version that was based on decision making by managers on identifying cost pools in the organization , and then assigning price drivers i.e. services, based on the number of transactions or events involved in the making of the product (Value Based Management.net 2010.)
In any company, the expense of serving a client can be calculated individually based on the costing processes. This can be accomplished by subtracting the price of the product and the expense of providing each customer with order to calculate the efficiency. This way, one will be able to determine the profit margins of each customer and thus position the products and services according to the profit. This is a practical use of this model to deal with the cost of doing business. Furthermore it helps to understand the ABC model assists employees aware of the different kinds of expenses that are involved. They also to analyze the costs as well as value added processes, allowing employees to reap the benefits earned from the goods and services created (Value Based Management.net 2010.).
In terms of cost management and decision-making, Activity Based Costing has added a new dimension known as The Activity Based Management that completely encompasses the entire management costing process. The management can analyze the non-value-added tasks and make logical decision-making about these activities. This approach in ABC model is based upon the ABC system to define which non-value-added processes are present and thereby determining the amount and value of the monetary gains related to the elimination of these activities. The other aspect of valueaa,!”added costing, is addressed in the complete models. Activity Based (ABC) Model (Dunn 2004; p.2).
Activity Based Costing is being used by many countries across different sectors all over the world. Different industries in the world economies have been reformed and their cost management strategies have been made simpler by the application in this method. For instance, certain areas of the economy like the manufacturing sector as well as the banking industry, retail, and even the government have an amazingly implemented ABC model to manage their costing.
Japan offers a more extensive case study to our discussion. It was the most influential on the development in the accounting for cost method which is essentially ABC on the trigger of technology (an external stimulus that spurs innovation) between 1984 and 1997. The technique was particularly effective on both the automotive and electronic sector. In the past, it was believed that the reasons behind low-wage workers and currencies that were undervalued were management practices that were innovative that utilized just-in-time material flow systems as well as statistical process control and continual improvement. Also, there was the problem of unfair competition as well as the use of poor management practices from other businesses (Accounting Coach 2004).).
Because that this was the case, we saw an development of costing methods that were new in a number of manufacturing sectors, including the automobile industry. This was in response to realizing that cost-accounting methods employed at the time had negative consequences for strategic and operational reasons. For instance in the year 2000, The Tektronix Company started allocating manufactured costs to particular products based upon the direct labor. This encouraged engineers to create products that require less effort to make when compared to prior years. This provided the engineers with a more affordable method of making their decisions (Turney 2008., p.3). Elimination of the behavior distortions that were inherent to the system of cost accounting allowed in enabling the Tektronix Company to compete.
Another area in which ABC was used in another area where the ABC method was applied and applied is the business industry and providing financial services. In the case of most technologies being developed, the introduction of first generation of methods aided the growth in the ABC market. A number of consultancy firms began to build up ABC procedures in mid 1980s the early 1990s, with the debut of the initial commercially-available ABC software. With the introduction of this technique the firm saw an increase in the profitability of these consultancy firms. This was due to the fact that ABC was an influencer in decision-making which affects profitability of the firm and was capable of identifying the causes of loss at the root of the decline in profits (Liu and Pan Liu and Pan, 2007). This method allowed the consulting firms to focus their efforts on most profitable customers and markets as well as design products that reduce costs and reduce non-value-added activities.
Activity-based Costing (ABC) is employed by many companies across various sectors that make up the market. For instance in the health industry, activity-based costing has offered an easier method of addressing concerns related to the delivery of medical services and products for its residents. The majority of hospitals such as Al Mowasat Hospital, Armed Force Hospital and King Faisal Hospital have benefited greatly from the method of activity-based cost management (ABM) techniques (Aird 1988). The hospitals have been able to improve their service quality and efficiency in their healthcare service delivery, while taking into account control of cost as well as resource control.
Another industry that has shown significant use in ABC has been the Oil Industry. ABC approach to improve efficiency in Saudi Arabia is the Oil Industry. The oil industry has to contend by a lot of competition that comes with more expensive costs. In order to thrive in the current market, businesses need to be able to manage costs quality, products or services using an effective method of cost control. Saudi Arabian Oil Company is one of the the petroleum firms that have an enormous petroleum reserve that are unrivalled in any region of the world. In order for the company to remain in the highly competitive market for oil, it employs a variety of methods for controlling costs including designing for production, quality control and, most importantly, activity-based costs as one of the main viewpoints (Galbraith and co 1998).
Activity Based Costing is an innovative approach to solving issues with cost management in a variety of sectors in Germany. Market-Trading, for instance, is an German company that offers primarily top quality and extremely furnished items to retail stores, whole sellers as well as retailers. The company has implemented the concept that is known as Activity Based Costing which attempts to assign the cost to the products that are related prior to releasing them onto the market. With this approach, there has been a higher competitive advantage for the firm in the face of rivals. This is the area of business transactions that involve providing goods and services. In the construction sector there has been greater use in ABC. ABC method by numerous companies. For instance, EU Solar Systems Limited brings together an exclusive team of experts from construction and sales, as well as information technology and engineering. Their principal products are selling solar panels as well as related solar-related products. Because of the high amount of costs involved in this process of production The EU solar company controls its costs making use of a well-defined cost accounting system based on using the ABC model (Polejewski 1990, p.4).
There are many challenges that managers working in an emerging economy confront when trying to apply the ABC method in a business. One of the biggest concerns that surround this ABC technique is difficulties of implementing. It is difficult to resolve the issue of allocating property. This is due to the fact that it requires lots of energy and effort and the process is effectively mapped across the company. In emerging economies, with a low work effort, the implementation of the ABC model will be more difficult. Furthermore the majority of emerging economies are not equipped with a proper method of implementing the model. The process of rationalizing facilities, identifying opportunities and then conceiving the appropriate solutions pose a challenge for these economies because of the lack of skilled personnel at the management levels (RCG University 1999).
Activity Based Costing is much sense to businesses that offer a wide assortment of goods or services and also those suffering from inaccurate costing data. The issue of implementation does not pose an issue, and this is due to the time and effort required for implementing ABC is well worth the time and effort. The emerging economies are largely devoid of big companies that provide multiple products, and the expense of adopting the ABC model can be a issue for the managers of the company.
Companies compete in a dynamic and ever-changing world of competition. So, companies must completely implement and use the ABC system to be more effective, efficient, and profitable. This will help them gain an advantage over their competitors. This means there is the need for careful analysis by management before implementing innovative methods and strategies for decision-making. This is why an additional amount is required to conduct a thorough analysis of different cost strategies (Klener and No 1997). The additional costs pose an issue for the companies that are in a new economy because of the lack of resources.
There are numerous challenges an administrator will encounter when implementing an ABC model in emerging economies. There are many challenges to overcome when creating and implementing the model. This problem is particularly prevalent in emerging economies due to the absence of sufficient resources for companies to be in the position to implement the model at a lower burden on costs. Maintaining and updating the model is an extra expenditure or expense for small businesses. In order to gather and integrate data, you need an increased level of skill employees, which is lower contrasted to steady economies (Galbraith and colleagues 1998). In addition reporting and disseminating combined data, as well as analysis and coming up with appropriate choices for cost management is a different issue for most companies.
ABC Model has been adopted in the past by a variety of businesses that are experiencing an increase of expenses. Their primary objective is to cut costs and improve the level of productivity. However, due to a variety of reasons, some firms have reported success in implementing the system however others have experienced difficulties in the implementation or have decided to reject the systems. This can be because of a variety of different causes (Klener and No 1997).
Certain companies that have reported favorable feedback regarding the implementation for the ABC model claim that their current tools permit faster development of these model of cost control. This capability is due to the effectiveness of modern tools as well as the speed of learning. This varies greatly across different sectors. For companies that are using outdated technology, they are likely to face a lot of opposition to the implementation that follows ABC. ABC approach (Liu and Pan Liu and Pan, 2007). A good example of the current technology that modern firms employ when implementing the latest cost management techniques includes the ABC software, which is a tool specifically designed for using the ABC method.
To allow the ABC method to be effective in the cost management of a business, it is essential to set aside time to allow it to be successful in its implementation. Many companies permit a lengthy duration for acceptance and understanding, due to the long learning curves. This can lead to more expensive accumulation of expenses due to the pooled costs that are associated to the implementation of the cost management method. It is also recognized that making changes isn’t something that people easily accept. A business will be willing to let its goals expand as they learn about the cost management method which was implemented within the particular company (Klener and No 1997). It is evident that this differs from one organization to the next, which results in a different in their approaches to implementation.
The integration of the ABC method in a company method requires the business which the system will be implemented be able to provide the necessary resources and capabilities to support the new system. Businesses with sufficient resources have a greater chance of being able to accommodate the changes brought on by the newly implemented cost management system. This is because their resources are able to handle the extra expenses required for an effective implementation. However businesses with a lower level of capital base or resources will require a lengthy period of time to establish the model or be unable to complete the process. This is due to the fact that the new system may appear to be an extra cost for the company, and may not be accepted by many small businesses (Liu and Pan 2007).
To ensure the success of a business in adopting ABC, ABC method, it has to be top management’s complete involvement. A company with the support of top management, there is an opportunity to achieve the successful adoption of the ABC model. The company’s culture of top-down management, in the initiation of the adoption of management techniques will be the determining factor in the effectiveness of cost management. In particular, because of the hierarchical nature of the company and the high percentage of dedicated employees will determine the effectiveness of the implementation of the ABC method within the company (Liu and Pan 2007).
Companies that have reported success with the application and implementation ABC model indicate that the model can be used to their business. However the firms who fail, it is clear that the model isn’t suitable for their cost management systems. For instance, companies with multiple services and product lines are at greater risk of embracing the ABC model than companies with a limited or single line of service or product delivery (Dunn 2004 p.4). So, the application of the ABC model is also together with the application of the model within the business.
In general, the activity-based costing is beneficial for companies that wish to raise their profit margins over the average level, and for those who want to manage their product related costs more efficiently. In this essay, we’ve observed how this method is widely utilized and accepted by businesses across the globe and has helped in the proper management of costs. But for a business to make the most of the model there must be a thorough procedure for implementation that guarantees the firm of the full benefit of the method. For companies who have succeeded in implementing the ABC model, they have lower expenses, increased profits and better control of costs associated with the products. So, ABC is seen to as both a cost-creasing and a cost-cutting tool. However, the advantages that result out of this model is more substantial, and the expenses of applying the model aren’t evident.