activity based costing - page 5
Keywords: ABC
By finil on 15/05/2009
Level: Master's degree (MA, MBA, MSc, MEng, MRes, MPhil etc)
Page Number: 5 of 8 pages: 1 2 3 4 5 6 7 8
knowledge of the activity for not only will they be best placed to make the judgement, but the credibility of the resultant system will to a large extent depend on their acceptance and use of it.
Cost Driver Analysis
The examination, quantification, and explanation of the effects of cost drivers. The results are often used for continuous improvement programs to reduce throughput times, improve quality, and reduce cost.
ACTIVITY BASED BUDGETING
In the traditional budgeting system the weaknesses of taking last year's actual expenditure and adjusting for a projected inflation rate and proposed new initiatives are well recognised. Activity Based Budgeting (ABB) is one way of moving away from such a system.
ABB means that the resulting actual versus budget comparison can be more meaningful. One reason is the fact that ABB is based on activities which cross traditional departmental boundaries, rather than the traditional budgetary system based on department. Another reason is that the actual cost driver volumes provide comparisons with budgeted volumes which can highlight, in non-financial terms, activities with major discrepancies from the budget. Managers frequently find such non-financial comparisons a more meaningful starting-point for investigating the reasons for such discrepancies than the simple financial comparisons of actual and budget. Some organization have found that investigation of variances in cost driver volumes give a better indication of action to be taken than their traditional budgeting system. This discussion of ABB has emphasised the importance of actives and cost driver volumes and these are also at the heart of the use of ABCM information. However, it is important to emphasise that many organization use ABCM information without having ABB.
ACTIVITY BASED COSTING MANAGEMENT
When have some of the ABCM literature it is easy to form the impression that ABCM can be equated with cost reduction. How ever , ABCM is really about cost management, which includes profit improvement and not just cost reduction. The identification of the value-added and core activities may mean increased expenditure on such activities. Exisiting ABCM case studies and research have revealed a number of uses of ABCM information. One of the most important of these has been the use of activity analysis as a common language within many organisation. Managers in different functional areas understand activities and cost drivers. Previously, managers did not believe the cost information based on traditional overhead absorption bases such as labour hours or machine hours, and did not use such information for
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