ACC202AssignmentsWeek 1 - Discussion 2

Understanding Activity-Based Costing and Activity-Based Management.

Activity-Based Costing is a modern technique used to understand the complexity of identifying, allocating and tracing back costs in an evolved business environment. Organizations have continued to grow and diversify into different markets, products, and services. Using simple costing systems to allocate costs broadly is no longer viable since it results in an inaccurate measurement of cost by the organizations at these levels of operations. Which is more, individual products or services, produced under similar factory conditions may in fact use resources in non-uniform ways. In attempting to understand activity-based costing, it is important to define activity. Activity refers to a part of a job that can be traced so as to track the total job. In activity based costing (ABC System), the emphasis is made on identifying activities that contribute to cost and consume resources.

Activity analysis is important as it identifies the building blocks on which cost allocation can be performed relevant to the job. Management accountants are critical in designing and implementing activity based costing due to their skills and expertise in the field. Part of their skill identifies activity within a job, and the variable involved in its operations; how many people are involved in the activity, how much time do they spend performing the activity and what resources are required to complete the activity.

The ABC System model has further been developed to monitor organization’s development. Management accountants can use the information from ABC system to access the data on the efficiency and effectiveness within the activity. The information that could be analyzed under ABC system provides useful information on the performance of the organization. As a secondary benefit, organizations that can restructure around ABC systems can experience unrealized profits. Management accountants look to identify the cost drivers and performance measures for activities. In organizations resources are assigned to activities and summed up with activity cost to come up with cost. By measuring and identifying these activity attributes, management can identify wasted resources as well as maintain continuous improvement. Management may create a cause and effect relationship between different activities and resource consumption, which helps product costing and cost control efforts (Swenson, 1995; Kock, 1995).

Horngren, Charles T., et al. Cost Accounting: a Managerial Emphasis, Pearson Australia, 2018, pp.138-141.

Khodadadzadeh, Tahereh. “A State-of-Art Review on Activity-Based Costing.” Accounting, 3 Dec. 2015, pp. 89–94. Researchgate, doi:10.5267/j.ac.2015.12.001.

Martin, James R. “Thorne, H. and G. Gurd. 1999. Activity-Based Costing: Improved Product Costing or Activity Management? Advances in Management Accounting (8): 173-194.” Product Costing or Activity Management?, https://maaw.info/ArticleSummaries/ArtSumThorneGurd99.htm.