During the last decades there was a change in organisations from managing vertical to managing horizontal. The organisations started to become process orientated instead of function orientated, and new management styles, like total quality management, just in time, benchmarking, or business process reengineering appeared. Which lead into an increase of overheads.
(Drury 2004a) The most important cost factors changed from direct costs like labour costs or materials, into indirect costs like set-up costs or administration costs. Therefore the traditional costing systems became more or less useless, because they presented poor cost information, which leads into decision errors.
Therefore the ABC- system of cost calculation seems to be a solution. The most important difference between traditional systems, and the ABC system, is the breakdown of overheads. In traditional costing systems, they are divided into cost centres, and accumulated products by using direct cost drivers. In the ABC system, they will be assigned to activities, which creates a greater number of cost centres with different cost drivers. They will be accumulated to products in the percentage of usage of an activity.
In this paper the ABC-system of cost calcualton is discussed and how it can be inplemented successfully within an organisation. Attention is also trwon to the most important failure in implementation of an ABC-approach, which should be avoided. To establish an ABC-approach within an organisation more than just a new calculation system is needed. An ABC-approach has to be implemented in the management system (ABM) and in the budgetting process (ABB). All in all, Activity based costing is much more than juast a costing tool. Successfully implemented it will help to understand costs better, an make the right decisions.
Table of Contents
- Introduction
- Designing ABC systems
- Identifying activities
- Assigning costs to activity cost centres
- Selecting appropriate cost drivers
- Transaction Drivers
- Duration Drivers
- Intensity Drivers
- Assigning the cost of the activities to products
- Strategic benefit of ABC approach
- Activity based costing (ABC)
- Activity based management (ABM)
- Activity based budgeting (ABB)
- Failure in implementation
- Resistance
- A high degree of inherent difficulty in implementation
- The threat of redundancy
- Expertise not held by the company
- Data-collection problems
- Conclusion
- References
Objectives and Key Themes
This paper aims to explore Activity Based Costing (ABC) as a solution to the limitations of traditional costing systems in the context of evolving organizational structures and cost factors. It examines the design and implementation of ABC systems, highlighting potential challenges and strategic benefits.
- The shift from traditional to activity-based costing systems.
- The process of designing and implementing an ABC system.
- The strategic advantages of ABC, including ABC, ABM, and ABB.
- Potential obstacles to successful ABC implementation.
- The importance of accurate cost driver selection.
Chapter Summaries
Introduction: This chapter introduces the shift from function-oriented to process-oriented organizations and the resulting increase in overhead costs. It explains how traditional costing systems, focusing on direct costs, became inadequate in this new environment, leading to inaccurate cost information and poor decision-making. The chapter positions ABC as a solution that addresses these shortcomings by focusing on the breakdown of overhead costs through activities and their associated cost drivers. It establishes the central problem and the proposed solution, setting the stage for the detailed discussion of ABC system design and implementation in subsequent chapters.
Designing ABC systems: This chapter details the four-stage process of designing an ABC system: identifying relevant activities, identifying overhead costs associated with those activities, selecting appropriate cost drivers, and assigning activity costs to products. It emphasizes the crucial importance of careful activity identification, suggesting methods like workplace analysis and employee interviews to aggregate tasks into meaningful activities. The chapter then delves into assigning costs to activity cost centers, discussing the allocation of both directly and indirectly attributable resources. Finally, it introduces three types of cost drivers – transaction, duration, and intensity – highlighting their strengths and weaknesses in accurately capturing cost relationships. This thorough explanation provides a practical framework for the implementation of an ABC system.
Strategic benefit of ABC approach: This chapter explores the strategic advantages of adopting an ABC approach, expanding beyond simple cost calculation. It examines Activity Based Costing (ABC), Activity Based Management (ABM), and Activity Based Budgeting (ABB), illustrating how a comprehensive ABC framework can improve decision-making across various organizational functions. The chapter likely highlights the improved cost visibility and accuracy enabled by ABC, demonstrating how these insights contribute to more effective resource allocation and strategic planning using ABM and ABB. By discussing these intertwined concepts, the chapter reinforces the overall impact of an integrated ABC system on an organization's strategic direction.
Failure in implementation: This chapter analyzes the potential obstacles to the successful implementation of ABC systems. It discusses various factors such as resistance from employees, the inherent complexity of implementation, the threat of redundancy, lack of internal expertise, and difficulties in data collection. The chapter likely provides insights into mitigating these risks, potentially suggesting strategies for change management, training, and data management to increase the likelihood of successful adoption. This provides a realistic perspective on the challenges involved and provides essential practical guidance for organizations considering an ABC transition.
Keywords
Activity Based Costing (ABC), Activity Based Management (ABM), Activity Based Budgeting (ABB), Cost Drivers, Overhead Costs, Traditional Costing, Cost Allocation, Activity Analysis, Implementation Challenges, Strategic Benefits, Transaction Drivers, Duration Drivers, Intensity Drivers.
Activity Based Costing (ABC) System Design and Implementation: FAQ
What is this document about?
This document is a comprehensive preview of a paper exploring Activity Based Costing (ABC) systems. It covers the design and implementation of ABC, its strategic benefits (including Activity Based Management (ABM) and Activity Based Budgeting (ABB)), and potential challenges in implementation. The preview includes a table of contents, objectives and key themes, chapter summaries, and keywords.
What are the main objectives of the paper?
The paper aims to explore ABC as a solution to the limitations of traditional costing systems. It examines the design and implementation process, highlighting the strategic benefits and potential challenges. Key themes include the shift from traditional to activity-based costing, the design and implementation process of an ABC system, the strategic advantages of ABC, ABM, and ABB, potential implementation obstacles, and the importance of accurate cost driver selection.
What are the key stages in designing an ABC system?
Designing an ABC system involves four key stages: 1) Identifying relevant activities; 2) Assigning overhead costs to activity cost centers; 3) Selecting appropriate cost drivers (transaction, duration, or intensity drivers); and 4) Assigning the cost of activities to products.
What are the different types of cost drivers discussed?
The document discusses three types of cost drivers: Transaction Drivers (based on the number of transactions), Duration Drivers (based on the time spent on an activity), and Intensity Drivers (based on the level of resources consumed by an activity).
What are the strategic benefits of using an ABC approach?
The strategic benefits extend beyond cost calculation and include improved cost visibility and accuracy, leading to more effective resource allocation and strategic planning through ABM and ABB. The integrated ABC system improves an organization's strategic direction.
What are the potential challenges in implementing an ABC system?
Potential challenges include employee resistance to change, the inherent complexity of implementation, the threat of redundancy, lack of internal expertise, and difficulties in data collection. The document suggests addressing these through change management, training, and effective data management strategies.
What is the difference between ABC, ABM, and ABB?
While all three are related and often implemented together, they represent different aspects of the activity-based approach: ABC focuses on accurate cost allocation, ABM uses this cost information for management decision-making, and ABB integrates ABC principles into the budgeting process for improved resource allocation.
What are the key takeaways from the introduction chapter?
The introduction highlights the inadequacy of traditional costing systems in the face of process-oriented organizations and increased overhead costs. It positions ABC as a solution by focusing on the breakdown of overhead costs through activities and cost drivers.
What is covered in the chapter on "Failure in Implementation"?
This chapter analyzes potential obstacles to successful ABC implementation, including resistance from employees, complexity, redundancy concerns, lack of expertise, and data collection problems. It offers insights into mitigating these risks.
What are the key words associated with this paper?
Key words include Activity Based Costing (ABC), Activity Based Management (ABM), Activity Based Budgeting (ABB), Cost Drivers, Overhead Costs, Traditional Costing, Cost Allocation, Activity Analysis, Implementation Challenges, Strategic Benefits, Transaction Drivers, Duration Drivers, and Intensity Drivers.
- Quote paper
- DI (FH) Andreas Leitner (Author), 2004, Activity Based Costing, Munich, GRIN Verlag, https://www.grin.com/document/38564
