Activity based costing Essay Example | Topics and Well Written Essays - 1500 words

application ground existing - Essay ExampleWith this new era of cost reduction and resource utilization,managers always afford to come up with ways to maximize their bottom-line One of the newest ways how companies can get increased cost-savings is by use a technique called Activity base Costing ( first rudiment). The main objective of this type of brass is proper identification of all cost categories and using basing decisions on this information. Most organizations that use ABC systems agree two costing systems the official costing system that is used for preparing external financial reports and the Activity establish Costing system that is used for internal decision making and for managing activities. Table of Contents Executive compact 1 Table of Contents 2 Introduction 3 Recent Studies in ABC 3 Role of ABC in Industries 4 Role in Manufacturing 5 Role in pecuniary Services 6 Role in Health Services 7 Role in sell 8 Role in Government 9 Limitations of ABC 10 Conclusion 11 Bibliography 12 Introduction The main objective of Activity Based Costing is to understand the various types of disk overheads that are touch the business. In comparison, normal accounting attempts to separate the different type of cost and the focus is on the cost of goods sold (or cost of services rendered in case of service companies). In this section, analysis of the various aspects of Activity Based Costing will be done, and how it is used effectively by managers in order to ready the maximum value for the company. A number of examples will also be looked into when it did not prove to be very effective for the organizations. The basis of Activity Based Costing is simple, non-manufacturing as well as manufacturing costs may be assigned to products. Moreover, some manufacturing costs may be excluded from product costs. All overhead costs are attached to a product and activity is used as a footstep of all the costs involved. The overhead rates or activity rates may be fou nd on the level of activity at capacity rather than on the budgeted level of activity. To compensate for the deficiencies of the pompous information systems, ABC requires firms to collect costs in specially constructed activity pools rather than service departments or overhead cost centers. Each of the pools corresponds to a group of similar business processes or activities that are self-coloured in that all costs assigned to the pool are influenced or driven by a common factor (Rafiq & Garg 2002). Recent Studies in ABC A prove in the year 2005 reason that nearly half (55%) of respondents suggested within their entirety that their companies were at that time making use of the Activity Based Costing either in an active fashion or in a pilot with other 32% considering use. Only one in ten which amounted to around 11% did not contemplate using the ABC. The manufacturing industry had the highest representation with 24%, followed by financial services at 18%, public sphere of influe nce at 16%, and communications at 8%. Other industries accounted for less than 5% each. The same study found out that out of all the industries being considered, the communication industry is the most aggressive in adopting the ABC system (Timlin 1998). The primary reason for this being that the Activity Based Costing uses various activities to report overhead directly to cost objects, such as products, processes, services, etc., avoiding the distortions of traditional costing systems. In order for the ABC system to be affective large investments will have to be made in IT to software documentation this need for categorical information. Role of ABC in Industries Now taking a look at the different industries and trying to analyze how ABC system is used to achieve different goals according to the company. era company goals may vary greatly, the purpose here is to identify how Activity Based Co