Activity Base Costing and AIS

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 a more rational, less arbitrary manner than traditional methods that would allocate a broad percentage of costs to products without any true measure of the accuracy of the approach.

By using activity-based costing, a company can treat more indirect costs as direct costs. This is important because some products or services consume more indirect costs than do other products or services.

In effect, the activity-based costing enables an accountant to trace the resource consumption and costs, which are mapped to the final outputs of a business. The mapping occurs in this manner:

Resources are assigned to activities.

Activities are assigned to cost objects based on estimates of the consumption.

Cost drivers are used to associate the activity costs of the outputs.

In his book, Management Challenges of the 21st Century, Peter Drucker clarified the primary distinction between activity-based accounting and traditional cost accounting. Thinking about indirect costs as a pool from which each activity draws a certain amount, it is apparent that traditional cost accounting hones in on the cost of actually doing something -- some definable activity. But activity-based accounting also shows the cost of not doing anything, for instance when production is held up and workers are just waiting around because a vendor has not provided a necessary part. Because of this capability, activity-based accounting is a definite improvement over traditional accounting.

Accounting Information System (AIS)

An accounting information system is a structure used by a business to collect, store, process, manage, retrieve and report its financial data.

The accounting information software applications are used to track activity using information technology resources.

The accounting information systems consists of these elements:

A system for the collection and storage of data

An application that processes financial and accounting data

Output in the form of statistical analyzed data

A means of accessing the processed data by so that it can be used by both internal and external stakeholders, such as accountants, auditors, business analysts, managers, chief financial officers (CFOs), consultants, and regulatory and tax agencies,

These functions are supported by hardware, devices, and system that enable the operation of the accounting information system.

Model Base Management

Security measures and a system of internal controls that are implemented to safeguard the data.

Sophisticated accounting information systems are sold by large software development companies, such as Microsoft, Oracle, Sage Group, and SAP.

These prebuilt software accounting packages can be fully customized to meet the business processes of an organization.

Large centralized systems referred to as enterprise resource planning (ERP) have provided improved connectivity and consolidation of the other business systems.

The primary catalyst for the development of enterprise resource planning was the need to cobble together interfaces to connect the various business system functions that had developed on separate trajectories.

Current versions of accounting information systems are fully integrated into the greater whole of enterprise resource planning, the components of which are a suite of handshaking applications for human resources, manufacturing, sales, and supply chain.

Technological advances have enabled accounting information systems to acquire a usefulness far beyond pure financial or managerial accounting. Today, these systems enable tracking of processes throughout the company and across all business domains.

Specially trained accountants generally work with accounting information systems as a means of assuring the accuracy in financial transactions and recordkeeping. These AIS trained accountants function in a manner that ensures financial data is kept intact and secure, while serving to make data readily available to those who have a legitimately need for access.

show the relation between activity base costing and accounting information system. write the paper as a presentation with a few illustrations of different activity base costing that corporation uses.

Activity-Based Costing Examples

In the example below, two typical manufacturing activities are represented through activity-based cost accounting.

A production machine is set up to run product batches.

Production of the units takes place.

Given annual manufacturing overhead costs of $2,000,000, roughly $200,000 is expended to set up the machines in readiness for production. A typical year shows the machine being set up approximately 400 times.

The per setup cost is $500, and the batch-level cost is $200,000.

With activity-based costing, the accountant can show stage 1 and stage 2 allocations for greater accuracy.

Stage 1 allocation is to the larger product class being manufactured, with Batch X consisting of 5,000 units priced at $0.10, which is 500 divided by 5,000 units.

Stage 2 allocation is to the units of product in each batch, with Batch Y for 50,000 units at $0.01 per unit priced at $.10 per unit., which is $500 divided by5,000 units).

The remaining allocation is for activities related to machine hours at $1,800,000 for 100,000 machine hours.

Table 1. The accounting coach. Retrieved http://www.accountingcoach.com/activity-based-costing/explanation/1

If a company produces 5000 units each day and creates 50 units per machine, the breakdown for cost allocation with or without activity-based change is shown.