activity based costing - page 7
Keywords: ABC
By finil on 15/05/2009
Level: Master's degree (MA, MBA, MSc, MEng, MRes, MPhil etc)
Page Number: 7 of 8 pages: 1 2 3 4 5 6 7 8
ABC systems only to this stage, as their objective has been to aid cost control and cost reduction rather than to calculate new unit costs.
3.Application of cost driver
To complete the operation of the system the cost driver rates are applied to the costing of product (or service) outputs. This costing requires two further conditions. Firstly, the cost driver measure must be capable of association with specific products. Thus, for example, the number of material movements occurring during a period must be monitored, collected and related to the product output. Establishing this type of data-gathering is often one of the extra costs of ABC. Second, unless the exercise is being done in retrospect for a past period, the rates must be predetermined,i.e. Based on estimated activity cost level and cost driver volumes for the current period. Only on this basis can the system operate to cost output as it happens. To maintain the integrity of the system these estimates will need monitoring and , if necessary adjusting regularly.
CONCLUSIONS
It is important to remember that ABC and ABCM have really only become popular since the late 1980s. To date only a minority of organizations have adopted ABC or ABCM, although interest still remains high as shown by the number of activity-based courses and publications and also by the number of firm offering activity-based consultancy services. However, it is still too early to know whether the activity-based approach will have long-lasting and fundamental effects on management accounting in the overhead ares or whether it will be like many other new management accounting techniques of the past which have become less widely used as time passes.
However, there are some encouraging signs for ABC and, in particular, for the activity-based approach. One such sign is that in many organizations the activity-based approach is not viewed as an accounting technique but as a management tool. In many cases managers have been the driving force behind the implementation of ABCM. Usually the accountant is only one member of the ABCM team and the managerial interviews have been conducted by other managers. Another advantage for the activity-based approach is that managers from different functional backgrounds relate very easily to the language of activities and cost drivers. In the longer term the fact that managers throughout an organisation are using this common language of the activity-based approach may turn out to be one of its main advantages.
In summary
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