Activity-based costing (ABC) is an accounting technique that identifies and assigns various cost to overhead activities then allocates the related cost to the products. Notably, various costs can be classified into a different category based on the associated cost driver or behavior (Pohlen & La Londe, 2014). The main objective of cost division is for the management to understand how these costs can be reduced to enable efficient implementation of ABC. Therefore, administrative and sales costs are categorized under non-production indirect cost overhead division while operational costs are classified under functional division. Unit level activities are associated with cost activities incurred every time a unit of product is produced. They include depreciation, factory suppliers and repair and maintenance. Hence they are identified with operational cost (Pohlen & La Londe, 2014). Similarly, batch level activities are related cost activities incurred each time a batch of good is produced; an example includes such activities as quality control, equipment setup and wages related to moving material. Therefore they are identified with operational cost.
Production level activities and facility level cost are activities needed to support production and to sustain the general manufacturing process respectively thus are identified with administrative cost and sale cost. Notably, unit level activities including machining and maintenance are associated with such cost drivers as the number of machine hours, labour hours and the number of units produced (Shields, 2011). Product-level activities, including supervision and product testing, are associated with potential cost drivers as the duration of supervision, hours of test and number of change orders. Batch-level activities including purchasing, consumer orders, receiving and purchasing are associated with such cost drivers as the number of materials consumed, number of orders made, number of customers and the number of purchase orders while facility-based activities including associated traceable cost like factory occupancy are associated with such cost drivers as number of employees, labour hours and machine hours.
Glazer health products should continue with their intention of using ABC to identify many costs as possible with the product. Therefore, the management will use activity-based costing to allocate various overheads to multiple functions. This would enable effective planning and control rather than inventory valuation. Moreover, such initiative as incorporating all operational cost related to administrative and sales cost related to various activities will permit the management to assume the steps or activities that must be succeeded by the production of products is what determines related overhead cost incurred (Shields, 2011). Moreover, it will enable the management to categorize each overhead to related category cost. This will enable various items of cost to be traced from the grouping or the cost category easily.
Therefore, ABC will provide a better allocation of Glaser's overhead cost instead rather than a costing system to look after various cost drivers. Moreover, the organization general composition of ABC system should include various activities, consumption of resources, objects and cost. Notably, with the implementation of activity-based costing Glaser should use preliminary and primary stage cost drivers to link various cost of resources used in one or more activity centers (Turney, 2012). For instance, some cost as batch-level activities are first allocated a primary stage activity and only require a one assignment process and thus traceable to a particular product through the use of cost drivers. Therefore, it is essential to use preliminary and primary stage cost drivers since they help the organization to assign various cost from activities to other activities.
Pohlen, T. L., & La Londe, B. J. (2014). Implementing activity-based costing (ABC) in logistics. Journal of Business Logistics, 15(2), 1.
Shields, M. D., (2011). An empirical analysis of firms' implementation experiences with activity-based costing. Journal of management accounting research, 7(1), 148-165.
Turney, P. B., (2012). Activity-based costing. In Management Accounting Handbook. Butterworth-Heinemann and CIMA
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