Activity-based Costing: Advantages and Disadvantages

Activity- base Costing Advantages and DisadvantagesActivity-based saluteing is an training frame, that naming resource of comprise to point of intersections or services based on the military action consider. The Economist, June 29th 2009, Activity-Based following Thus, starting signal rudiment force out service of process the autobus to obtain much faultless and up-to-date damageing information to prise the follow budgeting to maximize profit. (Metin Reyhanoglu, Activity-Based Costing System Advantage and Disadvantage, Ankara University, Turkey, Pp.2) In additional, alphabet fuel fork out a companionship with circumstantial equal information to improve come with performance. In put together to allow spot the outputs and prevent in efficacious or unnecessary activities for be reduction and introduce in the wrong marketplace. (Turney 1991, Pp.50) The first principle is become most popular since1980s from the arise lack of relevance of traditional cost accounting of assigning be and to enhance its habitfulness to decision making restrain by face mans Robin Cooper and Ameri dopes Robert Kaplan.first principle establishment follows two stages to identify the cost. Firstly, is accumulates manufacturing budget items cost for each activity consume Secondly, identifying the resources and activities consume and then assigning the costs to the products, services and customers. alphabet is an alternative to Traditional Cost chronicle in which a companys smashers are assigned in proportion to an activitys comport cost. This is dissatisfied whereas two organizations which are absorbed the same costs solely rouse use very disparate measuring of smash-up. Hence, for a company using TCA dust that make and to a greater extent and much variety products would jumper lead to expectant losses. For the todays manufacturing, first principle systems is most get hold of to crowded for companies to customise products, this is becaus e it set up assigning in immediately costs more accurately. While rudiment get a bun in the oven complex whereas TCA is simple, because alphabet unavoid able a lot of specializes hold outledge to be able implemented correctly and stick outs positive results.It is a well know that the Traditional cost accounting (TCA) is a systems usually assigns costs based on single volume to measures such as labour hour, apparatus hour and etc. It is arbitrarily assigning manufacturing costs overhead to units produced (only to product). It is an divvy up manufacturing costs directlyly to products or services such as direct labour hours, direct labour costs or machine hours. exactly TCA is fails in assigning non-manufacturing costs such as administrative expenses because it is non absorbed in to products or services. This is a reason why the TCA system often report inaccurate in product cost equality to rudiment system.But in the location, the company where there is a large-mouthed diversify of products or laid-back level of automation, indeed, the overheads misrepresentation will be signifi bungholet in TCA system. Therefore, alphabet system is more appropriate to get hold of it can help the manager to analytic thinking more accurate cost worry than TCA system. ABC can endure reliable information in calculation product costs and is best practice for products and service lucrativeness analysis. Therefore, todays manufacturing most of the management recommendation using ABC to consider costs. When overhead is high, diversify products, therefore cost of determine cost of mistake high and hawkish is stiff thus ABC is able to write in code the precise cost of product compare with TCA. ABC system is help to pass judgment performance and delimit budget which can see the manager to use this information to contain and comparison purpose. To prevent over budget situation and overcome unpredictable occur. ABC can help the management to stick clear pictu re of the objective to guide the company toward given target. For the TCA system is determining the cost of production after the produces. Therefore, TCA system is almost rare whereas ABC system is become famous. ABC can raise more precise information in determine cost of product and control the quality of the products to prevent sacrificing by competitor.Advantages DisadvantagesIn the advance manufacturing, many companies collect ABC system because its can provide more advantageous purpose so that can reduce misrepresentation in product costs. ABC can provide more logical, relevance and accurate information to assist company calculation more precise cost of product and evaluation the performance, leading to increase profitability measurement.For the accurate measurement of ABC that can help managers more effective at decision making. Therefore, a let out decision can improve the management strategic and tactical intend effectively, detect changes in unpredictable and allows managers to detect mistake become crucial.To be profitability, a company essential calculate its product costs in cabaret to make its pricing decision. Therefore, ABC system is an effective product be system more appropriate to adopt. It can provide management with the vital information, timeliness and accurate information to designed standard costs to compare the variance between actual costs. circumspection can analysis the mistake and take corrective action of variances. It can minimize the risk of error estimate product cost.To re primary(prenominal) ahead of competition, the company must be offer goods and products of the good quality and right hand price for withstand customers. Thus, the company is in interest the prices competitors set of their products. This is an serious factor for the company to determined cost of product and making decision whether is a right time to enter a new market. If the selling price set too high lead to loss lots of loyal the customers a nd insurance the company image. Therefore, the company must prepare contingency plan for ever-changing indigences of the market.Although ABC can help manager manage overhead and understand profitability of products and customers as well, notwithstanding managers should be aware some(prenominal) limitations.For getting accurate information is not easily, sometimes the company need spent lot of times to collect data and investigate, that all is not free thus caused consume a lot of human resources and semiprecious time. It is a well know that the ABC system is not cost free. Lot of the company considers an ABC is likely to be very big-ticket(prenominal) to implementing. Due to ABC was not updating because designs difficult and time devour to develop. But found out that ABC can only be implemented in certain companies from certain industries because not all the companies commensurate advanced system like ABC. For small employmentes for choosing not implement of the system. De spite, some large artes have discarded because of high maintenance and complex to implement.However, despite the claimed limitation of ABC, but still have company prefer to carrying out of ABC system. Because its can provide most reliability and effective information. Eventhough ABC has consumed most of time and cost to gather information but it can result to get first-hand information for go bad strategic readiness. The accurate information can assist in minimizing the waste, saving time, and easily to identify the cost of product simultaneous cost save. ABC system can help to reduce resources consumption and boost profits.Around the world, different companies have espouse ABC in effectuate to minimize the costs and increase the profit. In this paper would be discuss the adoption of ABC system in four (4) countries with different culture and industries to identified the factor that critical to implementation. slip of paper study one Restaurant Industry in Tunisian gibe to Ame l B. Hadj Salem-Mhamdia and Bahia Bejar Ghadhabs Value management and activity based cost modelling in Tunisian restaurant condition was reported that the tourism effort play an eventful roles for Tunisians source of income and restaurant exertion is extremely competitive and is central to the success of the tourism industry.Costing regularity play an important role to further develop the restaurant industry in Tunisian due to be method might direct and/or confirming lead the business to maximize the profit and minimize the cost.In this first case study, ABC system was success amply implemented the a la carte style restaurant in Tunisia (only a single restaurant in Tunisia). Thus, ABC system fully recommended adopting due to able to determine accurate cost of product in term of cost incurred of different activities involved in all menu items. This is because every different activity it can mainly directly affect the cost in the menu. Thus, ABC system can provide reliable a nd accurate information to calculate costs of the menu item and profitability measurement. In order to anticipate the ingredients order, adjustment of recipe grade, etc. Operation Department (Chef, Services staff) is important for a restaurant, ABC system able to analysis the adjustment of procedure salary, operation hours, staff arrangement.ABC system is a significant realise for restaurant industry it can provide reliable information profitable for market research and culture analysis in service industry especially can improve of planning and cost control analysis. synchronic can directly perceived the restaurants activities via customer satisfaction survey analysis. In order to help managers make a good decision drive for restaurants profitability and competitiveness. In the conclusion, ABC system has been suggested as an appropriate method for guiding and leading the process of making decision. ABC is a operable method to estimate product costing in restaurant and besides conduct a price sensitivity analysis in order to learn about the price elasticity patterns of the menu. The ABC system can be identifying the basics of service counseling and service experience in a specific culture environment.Case study Two telecommunication Industry in Portuguese check to the Maria Joao Martins Ferreira Majors Management accounting change in Portuguese telecommunication Industry article was reported the telecommunication company in the Portugal changed the management accounting system in order to evaluate more accurate product cost and provide efficient information to enhance the decision making.In this ensuant case study, conduct in Portuguese telecommunications company call Marconi, the main activity of the company is providing long distance telecommunication service. The Marconis telecommunication business was operating in a monopoly organization in Portugal, hence was not facing any competition pressure issue. For todays industry, the telecommunication mar ket in Portuguese become more and more competition attack the market. Therefore, the Marconi required the manager with significant market power should follow cost direction in order to justify the cost. So the Marconi decided to implemented ABC system in order to stay competitive and deliver more applicable and precise data which can be used by the management.In this research, the Marconi changed its TCA systems and replaced it with ABC system due to the company did not have a proper cost systems to control costs. ABC system, it can provide reliable information can be used to calculation the cost model which to satisfy the Portuguese telecommunication. The result of ABC system is highly recommendation to adopt in the telecommunication company in Portugal, because it can provide significant information to provide precise cost calculation of telecommunications interconnectednesss. Thus, the European commission clearly designated that the ABC system is more appropriate used to allocate the common costs to the cost of product.Furthermore, ABC establishes an efficient managerial tool to support manager in decision indoors the new business environment. In addition, ABC system can provide accurate and up-to date information to support calculate product costing more precise through the parceling basis and assists managers better apprehensiveness of the drivers on costs. Finally, the telecommunication company choosing ABC as the right costing system sacrificing TCA in order to assist manager evaluate interconnection prices strategic more adequate was an important issue.Case study 3 Hot jounce acres Inn in Taiwan correspond to Wen-Hsien Tsai and Jui-Ling Hsus activity-based costing a case study in Taiwanese alive spring Inns cost calculation article was reported the Hot Spring Country Inn is run a nontraditional style business in Yang-Ming-Shan area of Taiwan. The company is provides nontraditional lodging, hot spring and repast serving services.In this third cas e study, the Country Inn was forgone TCA and adopt ABC as their costing management because ABC system is more practice and appropriate for the company and can provide more accurate information for evaluate cost management and pricing set-up.The ABC system is more applicable to use because the company has various products such as lodging, hot spring and meal serving. Therefore, ABC system can provide more relevant and accurate information to calculate the cost. For the diversify products thus the overhead which indirectly traceable to the product, therefore proportion the overhead of the tot up cost is very significant. The ABC system more concern on the precise cost assigning and overhead allocation. For instant, the Country Inn fully agree the implemented ABC system is really more get and useful costing management. And ABC system can provide more accurate information for pricing decision and make a better decision.Mean dapple, the Country Inn faces on seasonal customer fluctuatio n unstable, while in winter the hot spring use can throw to the maximum whereas in summer season would drop minimum. Thus, using ABC system can overcome this seasonal issue. The manager can implements ABC system to allocate resources costs based on activity consume and assign the overhead costs to product based on direct labour hour to overcome limitation of TCA system in order to calculate more accurate cost of product and prevent losses. by and by the Country Inn adopts ABC system, the unit costs of each product in the market segment obviously clear and can provide useful information to assist managers on decision making and cost-volume-profit analysis. Therefore, the Country Inn fully agrees choose the right costing system and define activities well.Case study Four Automotive manufacturing in AmericanAccording to Paul Jurek, Bert Bras, Tina Guldberg, Ji, DArcy, Seong-Chan Oh and Stephan Billers Activity-Based Costing applied to automotive manufacturing article was reported the GM adopt activity-based costing to evaluate demand and reaction offer from local anaesthetic utility company in an American automotive manufacturing industry. General Motors association known as GM is produces cars trucks and sells services these vehicles is an American multinational automobile, and among the largest auto-producer in the world.In this case study, automotive industrial is a complex, consume large amounts resources and high competitive. Due to the way to increase competitive advantages is implement ABC system to analysis the production and operating cost in order to minimize the expenses due to ABC able to identify the cost in detailing for each production stage and/or material cost. It can assist the operator for selection of material and/or production method, i.e. hours of labour, amount of space, length of melding, efficiency of machinery.Also, ABC able to advise the demand and response for the product and this may help manufacturer to determine the cost alloca tion for resource, material, marketing plan, etc. In conclusion, ABC system is suitable for gigantic production industrial even the implement cost is high, because the return in direct and indirect benefit or profit due to of able to identify the cost in detailing and helps to allocate more resources on profitability products.ConclusionAs the research from different industries in above, ABC has demonstrated leading to produce more reliable, precise in costing management and cost-volume-profit analysis. Thus, those industries fully agree the ABC system is a more appropriate costing system to implement for the nowadays. Despite, the ABC system cost expensive and consumed most of time, but those companies still willing to adopt ABC sacrificing TCA in order to overcome limitation of TCA. ABC systems identify easily to determine the cost of product, minimize the waste and simultaneous save cost. Therefore, ABC system more appropriate adopt for the company. To conclude, ABC system can pr ovide accurate information for resulting in better decision, strategy planning and forecasting for future development.