Activity Based Method

Questions: If you have utilized an activity-based costing system in your former or current employment, describe how this system had been used. In your response, be sure to include your experience and position on the effectiveness of the activity-based costing system. Support your ideas by drawing on your readings and scholarly articles. If you have not encountered this type of system in your work experience, assume a company needs to switch to an ABC system. Describe the common cost drivers that could be used. How would the organization identify the cost drivers? How would the organization use them in the implementation of this system? You may use your former or current company for the analysis. Answers: Activity-based costing is a useful method for measuring the costs and performance activities, resources and also cost objects. The purpose is to create accurate cost information that provides support in different accounting and financial decision making process (Huynh, 2013). It is considered as a methodology rather than accounting practice and it helps to produce a bill of activities that explains the cost build of each product, services and also an individual customer. At first, it is required to recognize the relationship among resources, activities and cost objects related to products and customer (Chenhall, 2004). After recognizing the relationship, we can identify the inefficient and unnecessary activities through using the activity-based costing system. Not only that, but it also helps to identify the opportunities available for cost reduction and improvement of profitability. Cost driver can be considered as the reason or trigger for the changing of the cost of an activity (Horngren, Datar Rajan, 2012). This concept is mostly used in case of assigning the overhead cost related production of goods. Cost driver is also used in case of activity-based costing system to identify the causes of overhead. The purpose is to minimize the overhead costs. The examples of costs driver can be total labour hours taken for producing products, total machine hours, the total number of customer contacts, and the number of products returned by the customer, etc. Most organizations use total direct labour hours and total machine hours as the cost driver (Pike, Tayles Mansor, 2011). But for large organizations that want to identify the true costs, only one factor is not sufficient for them. They need to consider several factors for identifying the true costs. At first, it is required to identify cost object for determining the cost driver. Without identifying the cost driver cannot be identified. The aim of identifying cost driver is to allocate the costs of a target cost object among within its beneficiaries. Suppose a business organization has encountered problem-related to the regular material handling tasks. They are facing challenges related to proper allocation of total material handling costs to different working units. In this situation, the cost object is material handling costs. So, the organization can identify the cost driver setting the cost object as material handling cost. But so many cost drivers available for a cost object. So, it is required to investigate which driver has more impact on the relationship between activity and cost incurred. After identifying all costs drivers associated with each activity, the overhead head rate is determined by different types of products or different business units. Overhead rate is determined by dividing the total overhead costs through cost driver of each activity. Suppose a company two activities related to overhead costs such as deliveries to retailer and purchase orders. The two cost drivers associated with these activities are the number of deliveries to retailer and number of purchase orders. So, it is required to determine the overhead rate for two activities individually. The company also produces two types of products. So, the number of deliveries and number of purchase orders will be different for each product. The overhead cost for two products can be calculated by multiplying the overhead rates with the number of deliveries to retailers and number of purchase orders for two products. Reference List Chenhall, R. (2004). The Role of Cognitive and Affective Conflict in Early Implementation of Activityà ¢Ã¢â€š ¬Ã‚ Based Cost Management. Behavioral Research In Accounting, 16(1), 19-44. https://dx.doi.org/10.2308/bria.2004.16.1.19 Horngren, C., Datar, S., Rajan, M. (2012). Cost accounting. Upper Saddle River, N.J.: Pearson/Prentice Hall. Huynh, T. (2013). Apply Activity-Based Costing to Calculate Product Cost in Small and Medium Enterprises. International Journal Of Business And Economics Research, 2(3), 59. https://dx.doi.org/10.11648/j.ijber.20130203.13 Pike, R., Tayles, M., Mansor, N. (2011). Activity-based costing user satisfaction and type of system: A research note. The British Accounting Review, 43(1), 65-72. https://dx.doi.org/10.1016/j.bar.2010.12.001