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Traditional costing systems would not, in most cases, pick up this difference.
With traditional costing a company that makes both low and high volume products might spread all of its overhead to products it manufactures based solely on machine hours. This might misallocate overheads between products. And if one product demands a significant amount of engineering, testing and setup, but the other does not, the result will be some level of miscalculation of overheads. ABC/TDABC overcomes this problem by assigning overhead on more than the one activity of machine hours. Activity-based costing recognizes that the special engineering, special testing, machine setups, and others are activities that cause costs -- they cause the company to consume resources (Accountingcoach.com, n.d., para. 2-3). Due to the rapid pace and globalization of businesses, the costing model must be flexible and easily adaptable. It appears this is the big advantage ABC, or its big brother TDABC, have over the traditional model -- not to mention increased profitability due to more accurate costing.
ABC became popular in the early 1980s because there was dissatisfaction with traditional accounting methods. But at least part of the reason ABC fell out of favor was that companies had, for many decades, used traditional costing mechanisms, and they were integrated into their businesses. ABC was not easy to incorporate into a traditional company, but many soon found that its advantages outweighed the inconvenience of switching (Economist.com, 2009, para. 8)).
Bibliography
Accountingcoach.com. (n.d.). Activity-based costing. Retrieved July 9, 2009, from accountingcoach.com: http://www.accountingcoach.com/online-accounting-course/35Xpg01.html
Economist.com. (2009, June 29). Activity-based costing. Retrieved July 9, 2009, from Economist.com: http://www.economist.com/businessfinance/management/displaystory.cfm?story_id=13933812
Kaplan, R., & Anderson, S. (2005, January 24). Re-thinking activity-based costing. Retrieved July 9, 2009, from Harvard Business School: http://hbswk.hbs.edu/item/4587.html
Research Corner. (2009, April 28). Advantages and disadvantages of activity-based costing with reference to economic value addition. Retrieved July 9, 2009, from Scribd.com: http://www.scribd.com/doc/14751986/Advantages-and-disadvantages-of-activity-based-costing-with-reference-to-economic-value-addition
Bibliography
Accountingcoach.com. (n.d.). Activity-based costing. Retrieved July 9, 2009, from accountingcoach.com: http://www.accountingcoach.com/online-accounting-course/35Xpg01.html
Economist.com. (2009, June 29). Activity-based costing. Retrieved July 9, 2009, from Economist.com: http://www.economist.com/businessfinance/management/displaystory.cfm?story_id=13933812
Kaplan, R., & Anderson, S. (2005, January 24). Re-thinking activity-based costing. Retrieved July 9, 2009, from Harvard Business School: http://hbswk.hbs.edu/item/4587.html
Research Corner. (2009, April 28). Advantages and disadvantages of activity-based costing with reference to economic value addition. Retrieved July 9, 2009, from Scribd.com: http://www.scribd.com/doc/14751986/Advantages-and-disadvantages-of-activity-based-costing-with-reference-to-economic-value-addition
Activity-Based Costing and AIS Activity-Based Costing (ABC) is an accounting method that identifies the activities a company carries out and then assigns indirect costs (overhead) to products. Activity-based costing shows the relationships between the activities, the costs, and the products, and correctly associates the lion's share of the resources used with the actual production or provision of services. The recognition of these relationships enables the indirect costs to be assigned to products in
(Questions that will assist in quantifying the relationship between resources and activities include: How much time is spent performing each activity? What equipment is used to perform activities? Do some activities have dedicated equipment? Do some activities require more space than others?) After the data on resources have been collected, establish cause-and-effect relationships between resources and activities or resources and cost objects. The third step in the process is
ABC can identify high overhead costs per unit and find ways to reduce the costs, avoid decreases in head counts due to inaccurate allocation of costs, and measure profitability with higher accuracy than traditional costing that uses direct-labor hours as the only cost driver (Activity-based costing, n.d.). Bibliography Activity-based costing (ABC). (n.d.). Retrieved Apr 2, 2009, from Managers-Net: http://www.managers-net.com/activityBC.html Activity-based costing (ABC): What is it and how can reengineering teams use it?
Activity-Based Costing in Service Industries Describe the company you researched in one to two (1-2) paragraphs. Since many traditional industries that deal with goods for sale also offer some service, it was somewhat difficult to settle on a company that dealt in services exclusively. Home Depot or another of that sort would have been easy because they offer both, but the company used for this examination was State Farm. Insurance companies will
Activity-Based Costing and Traditional Systems Activity-based costing (ABC) measures the cost of a product/service based on the activities performed to produce the product/service. Activities are processes, functions, or tasks that occur over time and have recognized results. Activities use up assigned resources to produce products and services. An ABC system first allocates indirect and support expenses to activities and processes and then to products, services and customers. Therefore, the ABC system
General & Administrative-costs cannot reasonably be associated with any particular product or service produced (overhead). These costs would remain the same no matter what output the activity produced. An example would be salaries of personnel in purchasing department, depreciation on equipment, and plant security. In the next step the results of analyzing activities and the gathered organizational inputs and costs are brought together, which produces the total input cost for