Activity based costing and problems it could solve

natural process establish hailing and problems it could solve ope symmetryn ground liveing is a centering accounting technique that deals with grant of the overhead damage in a more logical mood as comp atomic number 18d to the traditional approach that deals with only allocating the be based on the machine hours. This approach is based on assigning the be commencement to their related activities and then finally assigning the woo of those activities to the yields that only bespeak these activities. body process based be recognizes that the machine setup, special testing, and special founding all ca pulmonary tuberculosis a fraternity to consume resources. This is the reason as to why this technique calculates the cost of these resources and then assigns them to the products that demanded the activities (Accounting Coach, 2004).As the environment of the manufacturing bulletproof moves from a manual ashes to a com regurgitateer-integrated manufacturing there is t he emergence of courtly cost remainss that may release announce of distorted products. in that locationfore, action based cost volition save this problem by collecting pecuniary and operational performance by performing the activity of tracing the remark competent activities of the operation to their final products more usefully. activeness based costing will perform the following activities in cost concern identifying the activity centers, selecting the kickoff cost drivers, and insurance coverage the cost activities. After this there follows the process of death penalty that ensures corrects utilization of the technique in cost caution (Klener and No, 1997).Activity ground Costing can support the animal trainers in trying to see how to maximise the shareholders value and also improve the general corporate governance. It started its function after manner of speaking in more advantages as compared to the traditional way of accounting. In the traditional way of acc ounting, it was believed that the in naughty spirits volume customers mean high direct of profits. still this is not the aspect of decision fashioning on activity based costing. first base principle exemplar came with a virgin version which based decision making by managers on identifying the cost pools in an arranging and then assigning the cost drivers i.e. run by con berthring the yield of events or transactions that are involved in the process of producing a bad-tempered product (Value found Management.net, 2010)In any special company, the cost constituent a customer can be determined individually basing on the costing activities. This can be d angiotensin-converting enzyme by deducting the product cost and also the cost of serving each customer in roll to arrive at the productivity. By doing this one can be able to identify the profitability of each customer and so position the products and services accordingly. This is a practical application of this type of regulate when dealing with costs. In addition to that, the rudiment mannikin helps to make the employees to understand the various types of costs involved. It also the helps them analyze the cost, value added and non-value added activities and thus enabling them to realize the benefits accrue from the products and services produced (Value Based Management.net, 2010).In cost oversight and decision making, Activity Based Costing has also an extension known as the Activity Based Management that fully touches all aspects of instruction costing. This waives the instruction to meet the non-value-added activities and hence make rational decisions on them. This technique in alphabet model relies on the alphabet dodging in specifying where the non-value-added activities exist and hence provide the value and amount of monetary benefits that are associated with their elimination. The other side of the valueadded costing is fully dealt with in the full model Activity Based ( alphabe t) Model (Dunn, 2004, p.2).Activity Based Costing has been adopted by many countries in variant sectors around the earth. Different sectors in the world economies encounter been modified and hence their cost prudence techniques simplified by the use of this model. For precedent, sectors of the economy such as the manufacturing industry, banking industry, retail industry, and even the disposal moderate a perfectly utilize first principle model in their vigilance costing.Japan provides a often more experimental case study for our discussion. There was a great impact of the innovations of the cost accounting technique, basically alphabet, on the technology trigger (an external impetus that stimulates innovation) mingled with the years 1984-1997. This was particularly applied on both the electronic and automotive sector. In the away it was believed that, the causes of low wage labor and undervalued currencies were the innovative management practices, just-in-time materia l flow of systems, statistical process control and continuous improvement. There was also the issue of unfair competition and credence of inappropriate management practices from other companies (Accounting Coach, 2004).As a result of this, there was the emergence of new costing approaches in several manufacturing industries including the automotive industry. This was after the realization that the cost accounting systems utilise at that time were associated with negative operational and strategic consequences. For example, the Tektronix Company started allocating manufactured overheads to the specific products based on the direct labor. This encourage the engineers to externalise products that unavoidable less labor to manufacture as compared to the past years. This method provided the engineers with a ofttimes cheaper way of making decisions (Turney, 2008, p.3). The elimination of the behavioral distortion that was inherent in the used cost accounting system helped the Tektr onix Company to compete.Another sector where the ABC method was enforced and used is the business sector and offering of financial services. With just about technologies, the development of the first generation methods encouraged the development of the ABC grocery. A large reduce of consulting fuddleds started building up the ABC practices in the late 1980s and proterozoic 1990s with an introduction of the first commercially available ABC packet. By the invention of this method, there was an increase in the train of profitability ratio by these consultancy firms. This was because ABC acted as a catalyst for decision making that is affecting the profitability take aim and was able to reveal sources of the loss that were prudent for the decline of the profitability level (Liu and Pan, 2007). The method helped the consultancy firms to develop new management on the profitable markets and customers, design products to remove cost, and eliminate the non-value added activities.A ctivity Based Costing is being used by a number of companies in different sectors of the economy. For example, in the healthcare industry activity based costing has provided an easier way of dealing issues regarding the furnish of health services and products to its citizens. Most of the hospitals kindred Al Mowasat Hospital, Armed Force Hospital and King Faisal Hospital take a leak benefited so much from the technique of activity based cost management (ABM) systems (Aird, 1988). This has enabled the hospitals to improve their quality and efficiency in healthcare service provision with consideration of the cost controls and resource management.Another sector that has expressed much utilization of the ABC method in Saudi Arabia is the Oil Industry. The anoint industry is faced with a high level of competition associated with high costs. because to be able to survive in this market, a firm needs to manage cost, quality, and product or service by means of an effective cost manag ement method. Saudi Arabian Oil Company is one of the of the petroleum companies that has a vast petroleum reserves that is unmatched in any part of the world. For the company to survive in the competitive anoint market it uses a number of systems for cost control such as, design for manufacturing, quality management and most importantly activity based costing as one of its core perspectives (Galbraith et al, 1998).Activity Based Costing has provided a new approach in solving cost management problems in many industries in Germany. For example, Market-Trading is a German enterprise that sells mainly high quality and highly furnished products to the retailers, whole sellers and even retailers. This company has implemented the model of Activity Based Costing that tries to allocate the costs to the related final products forward releasing them off to the market. Through this method there has been an increased competitive advantage gained by the firm in the market of competition. This is the sector of business trading dealing with provision of goods and services. In the reflection industry, there has been experienced more utilization of the ABC method by many firms. For example, the EU Solar Systems Limited brings together a bizarre team of fields of construction, sales, information technology and engineering. Their main products include scattering of solar panels and related solar products. Due to the high level of costs incurred in this production process, the EU solar company manages its costs by using a well defined cost accounting system basically the ABC model (Polejewski, 1990, p.4).There are a number of issues managers in an rising economy face when trying to implement the ABC method in a firm. One of the major issues that surround the ABC method is the difficulty of execution of instrument. What proves difficult is the issue of allocation of property. This is because it requires a plow of effort utility and that the processes are adequately mapped throughout the organization. In the emerging economies where there is inadequate utility effort implementing the ABC model is potential to be more cumbersome. In addition to that, most of the emerging economies want an appropriate way of approaching the implementation. Rationalizing facilities, identifying the opportunities and then conceptualizing proper solutions are a challenge to these economies delinquent to lack of skilled manpower in the management level (RCG University, 1999).Activity Based Costing makes a lot of sense impression to companies that produce a varied range of products or services and those that are suffering from inaccurate costing information. For these companies the issue of implementation is not such a big challenge, this is because the effort that is required to successfully implement ABC is worth their resources. The emerging economies mostly lack large companies that offer multiplex products, because the cost of implementing the ABC model is really a challenge to a manager of that company.Businesses are competing in an ever-changing competitive globe. Therefore companies are supposed to fully implement and apply the ABC system in order to become more productive, efficient and profitable and therefore earn a competitive advantage over other companies. This federal agency that there is need for careful analysis done by managers before shifting into new methods and techniques of decision making. Therefore, an additional investment should be put aside for proper analysis of the different types of cost techniques (Klener and No, 1997). These additional costs are a challenge to the managers of firms in an emerging economy collectible to limited number of resources.There are many challenges that a manager can face when trying to implement the ABC model in the emerging economies. First there are challenges in trying to design and build a model. This challenge is more rampant in the growth economies due to lack of adequate resources available for a firm to be in a position of implementing the model with less cost burden. modify and maintaining the model requires an additional investment or cost to the small companies. hookup and integrating data requires a higher level of skilled effect that is at a lower level as compared to the stable economies (Galbraith et al, 1998). Finally, reporting and disseminating the integrated data, analyzing it and coming out with relevant decisions son cost management is also another challenge to most firms.ABC model has been implemented over time by many companies that experience rising level of costs. Their main aim is to reduce costs and increase the level of productivity. However, due to some reasons some companies have reported successful implementation era others have reported problems with implementation of the systems or have rejected them. This going away occurs due to a number of varied reasons (Klener and No, 1997).Some companies that report plus feedback on the i mplementation of the ABC model state that some of their existing tools allow for a much quicker development of such cost management models. This ability comes from the quality of modern tools and the learning curve. This differs greatly through different industries. For those firms that have old-fashioned technology are seen to face much rejection towards implementation of the ABC model (Liu and Pan, 2007). An example of the modern technology that most up-to date firms use when implementing new cost management methods is the ABC software which is a specialized tool for the ABC method.For the ABC technique to have an impact on a companys cost management there is need of allocating time for it to be successfully implemented. Most companies allow a ache duration of time for acceptance and understanding because of the associated their long learning curves. This may lead to a higher accumulation of costs as a result of the pooled up costs associated with the implementation of the cost management technique. It is also understood that changes is not something that something that people readily accept. A company will be willing to allow its objectives to grow as their understanding of the cost management technique that had been implemented in that particular organization (Klener and No, 1997). This obviously differs from one company to another thus bringing about a difference in their implementation styles.Implementation of the ABC method into a company system requires that the company to which this system is to be implemented to have the required resources and capacity to be able to meet the system. Companies with adequate amount of resources are at a higher probability of accommodating the changes brought about by the new implemented cost management model. This is because the adequate resources can support the additional costs that are required for successful implementation of the model. On the other hand, companies with lower amount of resources or capital bas e will take a long duration of time to implement the system or they might report visitation in the implementation process. This is because the new system will seem to be an additional cost towards the company which may not be accommodated by many small firms (Liu and Pan, 2007).For the success of a company in implementing the ABC model, there must be the top management perfect involvement. For a company that has top management support provides an opportunity for the success of the implementation of the ABC model. The corporate culture of the top-to-down management in the instigation of the adoption of the management innovations will determine the success of the effective cost management. For example due to the hierarchical nature of the organization and taking into consideration of high proportion of dedicated professionals determines the success of the implementation of the ABC system within the organization (Liu and Pan, 2007).Firms that report success in the implementation of t he ABC model means that the model is applicable in their firms. On the other hand, for those that report failure show that the model is not applicable for their cost management systems. For example, firms that have multiple service and product provision are at a higher probability of accepting this model than firms with limited or one line of service and product provision (Dunn, 2004, p.4). Therefore, implementation of the ABC model also goes hand in hand with the applicability of the model in the company.In general, activity based costing method is effective to firms that want to increase their profitability level above the normal level and for those that want to manage the product associated costs more effectively. From the essay we have seen how this model has been widely used and accepted by firms in different countries and how it has assisted in proper cost management. However, for the firm to successfully use the model there is need for proper implementation process that assu res the company of perfect utility of the technique. For the firms that have successfully implemented the ABC model they enjoy reduced costs, higher profit levels and better management of the product associated costs. Therefore, ABC is seen to be both a cost-increasing factor and a cost-reducing factor. But the benefits that arise from the model are far much higher such that the costs of implementing the model are not felt.