Material Flow Cost Accounting and Activity Based Costing Systems

GAP iNTERDISCIPLINARITIES - A GLOBAL JOURNAL OF INTERDISCIPLINARY STUDIES, 2018

Activity based costing is a system of allocating overheads to jobs, processes or products on the basis of activities responsible for such expenses, instead of the traditional system, so that true and logical cost is obtained. According to traditional system, firstly the overheads are apportioned over various departments on some basis and then they are absorbed to the individual product on the basis of direct wages or direct labour hours or direct machine hours etc. Suppose factory overheads are absorbed on the basis of machine hours, this is not logical, because all factory overheads are not dependent on machine hours and so the overheads allocated are incorrect and consequently the total cost and selling price based on such costs are all incorrect and illogical, which may put business into trouble. The overheads are absorbed under Activity Based Costing on the basis of activities giving rise to overheads, e.g. to allocate the expenses of procurement of goods, it can be divided into...

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2012

In the early 1920s, direct labour comprised most of the total cost of manufacturing, and allocating overheads using direct labour hours or direct labour cost was sufficient for inventory valuation purposes, which was then the primary object of cost accounting. However, the upsurge of manufacturing overhead as a percentage of manufacturing cost at the expense of direct labour and proliferation of product lines complicated the otherwise relatively straightforward process of overhead cost allocation. Empirical evidence demonstrates that our understanding of how best to allocate overheads is at a nascent stage, and surprisingly most managers still do not know their costs. Moreover, managers have grave concerns about the current practice that allocates overheads to products in an arbitrary fashion. These concerns stem from the fact that managerial decisions are based on cost information furnished by management accountants, which is ostensibly inaccurate. This conceptual discussion paper ...

Available at SSRN 920957, 2006

This paper introduces the historical development of concepts and techniques in managerial accounting that have shifted management paradigms toward alternative methods of costs allocation. In addition, the paper evaluates past, current, and future trends in managerial accounting techniques and their influence on companies throughout the United States. The objective of this analysis is to provide activity based cost accounting users with a better, more focused perspective on how to transition their current accounting systems into the future based upon these paradigm shifts. Activity Based Costing (ABC) has demonstrated positive results for the companies that made it through the implementation process. As will be demonstrated, newly developed paradigms in cost accounting methodologies are adding to the complexity as to which system provides the best information for decision-making purposes. Within the context of these new cost accounting paradigm shifts, a critical issue is arising for current users of ABC. The issue addressed in this paper is the need for a hybrid methodology of costs allocation that provides better information for all strategic planning time horizons.

In today's world managers using computerized cost accounting systems can meet their needs to basic, consistent and reliable cost information. Since cost allocation is at the heart of most cost accounting systems, it is an inescapable problem in nearly every organization. In all cost allocation problems it is essential for managers to consider the behavioral implications of cost driver selection. Most of the cost allocation studies, have attempted to accomplish cost allocation methods within a one-by-one relationship between cost pools and cost drivers. In this research we present a new cost allocation method that attributes costs considering a multilateral relation between cost drivers and cost pools. We have used a mathematical presentation to solve the plurality observed in relationships between cost drivers and cost pools. At the end For the purpose of illustrating the concepts and technique a simple case study is presented to portray the probable differences between proposed methods.

The subject matter of this paper is the detailed consequences of putting in place an Activity-Based Costing system and its structure within the manufacturing industry. Moreover, it defines steps within ABC application, as well as analyzing the input and output information and data required for effective utilization of the system. The close bond between cost allocation methodology and application procedures is also determined within this work, thereby describing all the features necessary for effective ABC implementation. The results published herein come from research projects run over a 3-year timeframe, ones focused on the methodology of implementing an Activity-Based Costing system and its resultant influence on the efficiency of manufacturing businesses. The author has conducted a number of ABC system applications in manufacturing industries in order to gather the data and information necessary to define application and allocation principles.The paper reveals two final outcomes. The first of these determines the methodology of building an ABC system, looking at the essential steps necessary to construct a system in an organization. The other describes cost allocation methodology, which is performed within separate stages of implementation.The major part of paper is dedicated to explaining the methodological steps within ABC implantation, which include a feasibility study and review, activity and cost object definition, assigning costs to activities, defining the appropriate cost drivers for individual activities, determining the output measures for individual activities, calculating the primary rates of individual activities, assigning the costs of support activities to primary activities, and calculating the costs of defined cost objects.One important issue that determines the eventual form and structure of the ABC system is senior managers' demand for data utilizable for decision making. All these requirements need to be defined in relation to the structure of the system. An effectively implemented Activity-Based Costing system then provides accurate product costing and proves a useful aid for managing business operations. In the final part of paper, the results are discussed according to the all features of ABC application in the manufacturing industry.

2008

This paper analyses the management accounting applications which try to improve the Activity-based Costing method. In the first part, we describe them using the Strategic Management Accounting stream. Then, we present the main features of these applications. In the second part, we examine in details two of these features: The widening of the analysis perimeter and the relevant level of details to analyse the costs. Then, we analyse several proposals: Customer Profitability Analysis (CPA), Interorganizational Cost Management (IOCM), Resource Consumption Accounting (RCA) and Time-driven ABC (TDABC). Finally, we describe an experience observed in the IT supply European division of an international group. This group experiments what we call at the end a supply chain ABC tool to manage its interorganizational relations.

annals.fih.upt.ro

This paper describes a procedure that allows small and medium companies to smoothly switch from a traditional costing system to an Activity Based Costing (ABC), at low risk and with minimal investment. The paper focuses on any small and medium company for which the standard implementation of ABC is too expensive and complex. The complete implementation procedure consists of eight major steps. At first, decisionmakers choose among three methods, educated guess, systematic appraisal, or actual data collection, for obtaining cost information. At this stage, the decision-makers determine the level of accuracy that is needed and the amount of money to be assigned to this project. Next, the overhead expenses such as administration, rent, utilities, and transportation are complied into product cost information using newly developed matrices. Using these matrices, cost related calculations are simplified and thus the overhead costs are easily traced to the cost objects in the final step. The easy-of-use of the proposed procedure is illustrated using actual data from a medium manufacturing company.

Engineering Management Journal, 2004

This paper describes a procedure that allows small companies to smoothly switch from a traditional costing system to an Activity Based Costing system at low risk and with minimal investment. The paper focuses on any type of small company (less than 100 employees) for which the standard implementation of Activity Based Costing is too expensive and complex. The implementation guide leads a company step-by-step through Cooper's two-stage activity based cost system model. The complete implementation procedure consists of eight major steps. At first, decision-makers choose among three methods, educated guess, systematic appraisal, or actual data collection, for obtaining cost information. At this stage, the decision-makers determine the level of accuracy that is needed and the amount of money to be assigned to this project. Next, the overhead expenses such as administration, rent, utilities, and transportation are compiled into product cost information using newly developed matrices. Using these matrices, cost related calculations are simplified and thus the overhead costs are easily traced to the cost objects in the final step. The easy-of-use of the proposed procedure is illustrated using actual data from a small tool & die manufacturing company.

Research Journal of Finance and Accounting, 2018

Accurate and analytical cost information is vital for operational and strategic decisions in an organization. Overhead costs are one of main components of the product cost along with direct material and direct labour costs. Since overheads are allocated by means of simplistic cost drivers, e.g., labour hours, process time, traditional cost methods were criticised by activity based cost supporters, claiming traditional methods were distorting the cost information. ABC was designed and developed to provide more accurate and analytical cost information by means of appropriate cost drivers to allocate overhead costs fairly. The purpose of this study to examine and understand the adoption and effectiveness of cost systems especially ABC (Activity Based Costing) in publicly listed large manufacturing companies in Turkey. The results of the study indicates that 35 Turkey's manufacturing companies out of 193 publicly listed manufacturing companies, calculates the production cost mainly by traditional cost systems. 15 of responders replied that they have adopted ABC. On the other hand, 20 of the participants stated that they were still using traditional cost systems. Even though ABC users assessed their cost systems more successful for a few applications, for the rest of applications traditional method users assessed their system as more successful against ABC users.