The paper has been formulated in order to determine the basic differences that are present between the activity based costing (ABC) and conventional methods of costing that are used around the world. A large number of companies have converted to the ABC system since as far back as 1980 as the system has shown its usability in the appropriate product mix decision, overheads management etc. (Roztocki 2000) (Reyhanoglu 2004)
The benefits and drawbacks are as follows:
Advantages of an Activity Based Costing System:
• The first and most important advantage is the accuracy in the process of costing with regards to the product line, the end-users of the product, the stock-keeping units employed by the management and the channel and category which streamline the flow of the product from the producer to the end user.
• This system better assists in the process of understanding the concept of overhead costs i.e. the allocation of common business resources as they are used by specific product lines and their relation to specific cost driver.
• The system is easy to understand and interpret is it is accessible, useable and practically implement able across all norms of business set-ups.
• This process uses unitary cost, or marginal cost as the computation base in contrast to the traditional cost accounting methods which employ total cost.
• The system works exceptionally well will quality improvement and up gradation programs e.g. Six Sigma
• This system is particularly helpful in identifying and ear-marking some of the matters business activities which are a burden or stress on the business i.e. wasteful or non value adding services.
Table of Contents
- Chapter 1: Introduction
- 1.1 Introduction
- 1.2 Objective
- 1.3 Background
- Chapter 2: Literature Review
- 2.1 The Need for Activity Based Costing
- 2.2 Advantages of an Activity Based Costing System
- 2.3 Disadvantages of an Activity Based Costing System
- 2.4 Technical Limitations
- 2.5 Advantages of Activity Based Costing: Case of CommQuest
- 2.6 Implementing an Activity Based Costing System
- Chapter 3: Research Methodology
- 3.1 Methodology
- Chapter 4: Data and Variables and Findings
- 4.1 Primary Research: Impressions of ABC in the Industry
- 4.2 Integrated ABC and Economic Value Added Systems
Objectives and Key Themes
The objective of this paper is to investigate the advantages and disadvantages of Activity Based Costing (ABC) in manufacturing, particularly within the context of overcoming the shortcomings of traditional absorption costing. The study aims to determine if ABC is a best practice for manufacturing concerns and its effectiveness in addressing industry challenges. This is achieved through a literature review, a case study, and analysis of data obtained through site visits and interviews.
- Comparison of Activity Based Costing (ABC) and traditional costing methods.
- Advantages and disadvantages of implementing an ABC system.
- The application of ABC in addressing issues of overhead allocation and cost accuracy.
- The role of ABC in improving profitability and decision-making.
- Case studies and empirical evidence related to the effectiveness of ABC.
Chapter Summaries
Chapter 1 - Introduction: This chapter sets the stage for the study by introducing the fundamental differences between activity-based costing (ABC) and traditional costing methods. It highlights the increasing adoption of ABC since the 1980s due to its usefulness in product mix decisions and overhead management. The chapter establishes the research objective of determining whether ABC is a best practice for manufacturing and its ability to address industry challenges. It also provides background information on the increasing demand for motor vehicles and related products in China, while noting the unimpressive profit margins in the tire manufacturing industry, setting the context for the subsequent analysis.
Chapter 2: Literature Review: This chapter delves into the existing literature on activity-based costing, exploring its advantages and disadvantages. It examines the need for ABC, highlighting its superior accuracy in costing across various product lines, end-users, and distribution channels compared to traditional methods. The chapter also discusses the benefits of ABC in understanding overhead costs, its ease of interpretation and implementation, and its compatibility with quality improvement programs. However, it acknowledges the disadvantages, such as time-consuming data collection and potential high implementation costs, as well as the increased transparency that may not appeal to all managers.
Chapter 3: Research Methodology: This chapter outlines the methodology employed in the research. While details about the specific methodology used are limited in the provided text, it is understood that the methodology is crucial in obtaining and analyzing data used to support the conclusions and arguments made in the later chapters. This likely involves a mix of qualitative and quantitative methods to compare the results under traditional and ABC costing.
Chapter 4: Data and Variables and Findings: This chapter presents the primary research findings, which are likely based on the methodology described in Chapter 3. It integrates the gathered data on the practical application and industry impressions of ABC in order to understand the effectiveness of ABC in improving profitability and decision-making. The integration of ABC and Economic Value Added systems is a key component of this chapter, suggesting a comparative analysis of the two approaches. Specific details regarding the findings are not available in the text excerpt.
Keywords
Activity-based costing (ABC), traditional costing, overhead allocation, cost accuracy, profitability, manufacturing, decision-making, case study, empirical evidence, economic value added, tire manufacturing industry.
Frequently Asked Questions: A Comprehensive Language Preview on Activity Based Costing
What is the overall objective of this document?
This document provides a comprehensive preview of a study investigating the advantages and disadvantages of Activity Based Costing (ABC) in manufacturing. It aims to determine if ABC is a best practice and how effective it is in addressing industry challenges, specifically within the context of overcoming the limitations of traditional absorption costing.
What topics are covered in the document?
The document covers a range of topics including: a comparison of ABC and traditional costing methods; the advantages and disadvantages of implementing an ABC system; the application of ABC in addressing overhead allocation and cost accuracy; the role of ABC in improving profitability and decision-making; and case studies and empirical evidence related to the effectiveness of ABC. It also includes an introduction, literature review, research methodology, and presentation of findings.
What are the key themes explored in this study?
Key themes include the accuracy of cost allocation, the impact of ABC on profitability and decision-making, the challenges of implementing ABC (including time and cost), and the comparison of ABC with traditional costing methods. A specific case study within the tire manufacturing industry is also included.
What is the structure of the document?
The document is structured into four main chapters: Chapter 1 (Introduction) provides background and sets the research objective; Chapter 2 (Literature Review) explores existing research on ABC; Chapter 3 (Research Methodology) details the research approach; and Chapter 4 (Data and Variables and Findings) presents the primary research results, including an analysis integrating ABC and Economic Value Added systems. Each chapter is summarized within the document.
What methodologies were used in the research?
While the specific details of the methodology are limited in the preview, the study likely employs a mix of qualitative and quantitative methods to compare the results under traditional and ABC costing. The methodology involves data collection through site visits and interviews.
What are the key findings of the study (as previewed)?
Specific details of the findings are not provided in the preview; however, the preview indicates that Chapter 4 presents primary research findings on the practical application and industry impressions of ABC, aiming to understand its effectiveness in improving profitability and decision-making. The integration of ABC and Economic Value Added systems is a key aspect of the findings.
What are the advantages and disadvantages of Activity Based Costing (ABC) discussed in the document?
Advantages include superior accuracy in costing across various product lines, improved understanding of overhead costs, ease of interpretation and implementation, and compatibility with quality improvement programs. Disadvantages include time-consuming data collection, potentially high implementation costs, and increased transparency that may not appeal to all managers.
What is the significance of the case study in the tire manufacturing industry?
The case study provides a real-world example of the application of ABC within a specific industry (tire manufacturing) and helps illustrate the practical implications and challenges of implementing ABC in a manufacturing context. The industry's unimpressive profit margins are cited as a key motivation for investigating ABC's potential.
What keywords are associated with this study?
Key words include: Activity-based costing (ABC), traditional costing, overhead allocation, cost accuracy, profitability, manufacturing, decision-making, case study, empirical evidence, economic value added, tire manufacturing industry.
- Quote paper
- Joyce Maingi (Author), 2011, Advantages & Disadvantages of activity based costing with reference to economic value addition, Munich, GRIN Verlag, https://www.grin.com/document/265631
