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Activity based costing and problems it could solve

Activity structured costing is a management accounting approach that deals with assigning of the over head costs in a more logical manner when compared with the traditional procedure that deals with only allocating the expenses based on the machine hours. This process is based on assigning the costs first with their related activities and then finally assigning the costs of those activities to the products that only demand these activities. Activity established costing identifies that the machine setup, special testing, and special executive all result in a company to consume resources. This is the reason as to why this system calculates the price of these resources and then assigns them to the products that demanded the activities (Accounting Mentor, 2004).

As the surroundings of the production firm goes from a manual system to a computer-integrated making you have the emergence of conventional cost systems that may release report of distorted products. Therefore, activity based mostly costing will save this problem by collecting financial and functional performance by executing the activity of tracing the significant activities of the procedure to their final products more effectively. Activity based charging will perform the following activities in expense management; identifying the activity centers, selecting the first cost individuals, and reporting the cost activities. Following this there follows the process of implementation that ensures corrects utilization of the technique in expense management (Klener and No, 1997).

Activity Centered Costing can support the professionals in trying to see how to maximize the shareholders value and also improve the general corporate governance. It started out its function after attracting more advantages as compared to the traditional way of accounting. In the original way of accounting, it was thought that the high amount customers mean high level of earnings. But this isn't the truth of decision making on activity established costing. ABC model was included with a new version which structured decision making by professionals on identifying the cost pools in an firm and then assigning the cost motorists i. e. services by considering the number of incidents or ventures that are involved in the process of creating a particular product (Value Founded Management. online, 2010)

In any particular company, the cost serving a customer can be identified singularly basing on the costing activities. This is done by deducting the product cost and also the cost of portion each customer to be able to reach at the efficiency. By doing this one can be able to identify the profitability of every customer and therefore position the products and services appropriately. That is a request of this type of model when working with costs. In addition to that, the ABC model helps to make the employees to understand the various types of costs involved. It also the helps them review the price, value added and non-value added activities and therefore enabling them to understand the benefits accrued from the merchandise and services produced (Value Founded Management. online, 2010).

In cost management and decision making, Activity Based Costing has also an expansion known as the experience Based Management that fully touches all areas of management costing. This enables the management to look at the non-value-added activities and hence make rational decisions to them. This system in ABC model depends on the ABC system in specifying where in fact the non-value-added activities exist and hence provide the value and amount of monetary benefits that are associated using their reduction. The other area of the value"added costing is completely handled in the full model Activity Established (ABC) Model (Dunn, 2004, p. 2).

Activity Based mostly Costing has been followed by many countries in several sectors around the world. Different sectors on earth economies have been modified and therefore their cost management techniques simplified through this model. For example, industries of the current economic climate like the manufacturing industry, banking industry, retail industry, and even the federal government have a perfectly implemented ABC model in their management costing.

Japan offers a a lot more experimental research study for our discussion. There was a great impact of the improvements of the price accounting technique, basically ABC, on the technology cause (an external impetus that stimulates development) between the years 1984-1997. This is specifically applied on both electronic and motor vehicle sector. In the past it was believed that, the sources of low income labor and undervalued currencies were the impressive management practices, just-in-time material stream of systems, statistical process control and continuous improvement. There is also the issue of unfair competition and adoption of improper management practices from other companies (Accounting Trainer, 2004).

As due to this, there was the emergence of new costing strategies in several processing industries including the automotive industry. This is after the realization that the price accounting systems used at that time were associated with negative operational and strategic outcomes. For instance, the Tektronix Company started allocating produced overheads to the precise products based on the direct labor. This prompted the engineers to create products that required less labor to manufacture as compared to the past years. This technique provided the designers with a much 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 Tektronix Company to remain competitive.

Another sector where the ABC method was executed and used is the business enterprise sector and offering of financial services. With most technology, the development of the first technology methods encouraged the introduction of the ABC market. A lot of consulting firms started building up the ABC techniques in the late 1980s and early on 1990s with an release of the first commercially available ABC software. From the invention of this method, there was a rise in the level of profitability proportion by these consultancy companies. This is because ABC acted as a catalyst for decision making that has effects on the success level and could reveal resources of the loss that were in charge of the decline of the success level (Liu and Pan, 2007). The technique helped the consultancy companies to build up new focus on the profitable marketplaces and customers, design products to eliminate cost, and get rid of the non-value added activities.

Activity Based Costing is being used by lots of companies in several sectors of the overall economy. For instance, in the professional medical industry activity established costing has provided a less strenuous way of working issues regarding the provision of health products to its individuals. Most of the private hospitals like Al Mowasat Medical center, Armed Force Medical center and Ruler Faisal Medical center have benefited very much from the approach of activity based mostly cost management (ABM) systems (Aird, 1988). This has enabled the hospitals to boost their quality and efficiency in health care service provision with thought of the cost controls and reference management.

Another sector that has portrayed much usage of the ABC method in Saudi Arabia is the Olive oil Industry. The essential oil industry is confronted with a high degree of competition associated with higher costs. Therefore to have the ability to survive in the forex market, a firm needs to control cost, quality, and product or service through a powerful cost management method. Saudi Arabian Oil Company is one of the of the petroleum companies which has a huge petroleum reserves that is unmatched in any area of the world. For the company to endure in the competitive petrol market it runs on the amount of systems for cost control such as, design for making, quality management and most importantly activity based costing as you of its key perspectives (Galbraith et al, 1998).

Activity Based Costing has provided a fresh approach in handling cost management problems in many business in Germany. For instance, Market-Trading is a German business that sells mainly high quality and highly furnished products to the suppliers, whole vendors and even vendors. This company has executed the model of Activity Centered Costing that will try to allocate the expenses to the related final products before launching them off to the marketplace. Through this technique there's been an increased competitive edge gained by the firm on the market of competition. This is actually the sector of business trading interacting with provision of goods and services. Within the construction industry, there's been experienced more usage of the ABC method by many businesses. For example, the EU Solar Systems Small brings together a unique team of areas of development, sales, it and engineering. Their main products include circulation of solar power panels and related solar products. Because of the high level of costs incurred in this creation process, the European union solar company handles its costs by by using a well identified cost accounting system basically the ABC model (Polejewski, 1990, p. 4).

There are a number of issues professionals in an growing market face when seeking to execute the ABC method in a firm. One of the major issues that encircle the ABC method is the difficulty of execution. What shows difficult is the problem of allocation of property. It is because it requires a great deal of effort electricity and that the procedures are sufficiently mapped throughout the business. Within the emerging economies where there is inadequate utility effort employing the ABC model may very well be more cumbersome. Moreover, most of the rising economies lack a proper way of approaching the execution. Rationalizing facilities, figuring out the opportunities and then conceptualizing proper solutions are an issue to these economies as a consequence to lack of skilled manpower in the management level (RCG College or university, 1999).

Activity Based Costing makes a great deal of sense to companies that create a varied selection of products and those that suffer from inaccurate costing information. For these businesses the issue of implementation is not such a big challenge, it is because the effort that is required to successfully implement ABC will probably be worth their resources. The emerging economies largely lack large companies offering multiple products, therefore the cost of implementing the ABC model is really challenging to a manager of this company.

Businesses are fighting within an ever-changing competitive world. Therefore companies are supposed to fully execute and apply the ABC system to be remembered as more productive, successful and profitable and for that reason earn a competitive benefits over other companies. Which means that there is dependence on careful examination done by managers before moving into new methods and techniques of decision making. Therefore, an additional investment should be placed apart for proper analysis of the different types of cost techniques (Klener and No, 1997). These additional costs are an issue to the managers of firms within an emerging economy due to limited amount of resources.

There are extensive challenges that a manager can face when endeavoring to apply the ABC model in the emerging economies. First there are difficulties in trying to create and create a model. This problem is more rampant in the growing economies due to lack of adequate resources available for a company to maintain a posture of applying the model with less cost burden. Upgrading and keeping the model requires an additional investment or cost to the tiny companies. Gathering and integrating data takes a more impressive range of skilled personnel that is at a lower level when compared with the stable economies (Galbraith et al, 1998). Finally, confirming and disseminating the included data, inspecting it and developing relevant decisions kid cost management is also another task to most companies.

ABC model has been carried out over time by many companies that experience rising degree of costs. Their main aim is to lessen costs and boost the level of output. However, due for some reasons some companies have reported successful execution while others have reported problems with execution of the systems or have declined them. This difference occurs credited to lots of assorted reasons (Klener and No, 1997).

Some companies that report positive reviews on the implementation of the ABC model declare that some of their existing tools enable a more speedily development of such cost management models. This ability comes from the grade of modern tools and the learning curve. This is different greatly through different sectors. For those companies that contain old-fashioned technology have emerged to handle much rejection towards implementation of the ABC model (Liu and Pan, 2007). An example of the modern technology that most up-to date businesses use when applying new cost management methods is the ABC software which really is a specialized tool for the ABC method.

For the ABC strategy to impact over a companys cost management there is need of allocating time for it to be successfully applied. Most companies allow a long duration of time for popularity and understanding due to associated their long learning curves. This may lead to an increased accumulation of costs consequently of the pooled up costs from the implementation of the cost management technique. Additionally it is known that changes is not something that something that folks readily accept. A corporation will be happy to allow its goals to develop as their knowledge of the price management technique that were implemented for the reason that particular company (Klener and No, 1997). This certainly differs from one company to another thus bringing about a difference in their execution styles.

Implementation of the ABC method into a business system requires that the company to which this technique is to be implemented to really have the required resources and capacity to have the ability to accommodate the system. Companies with adequate amount of resources are at a higher probability of accommodating the changes as a result of the new executed cost management model. This is because the enough resources can support the excess costs that are necessary for successful execution of the model. On the other hand, companies with lower amount of resources or capital basic will take an extended passage of time to implement the machine or they might report failing in the implementation process. This is because; the new system will appear to be an additional cost towards the business which might not be accommodated by many small firms (Liu and Skillet, 2007).

For the success of a company in employing the ABC model, there has to be the very best management perfect participation. For a company that has top management support has an chance 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 improvements will determine the success of the effective cost management. For example due to the hierarchical character of the business and considering of high percentage of dedicated pros decides the success of the execution of the ABC system within the organization (Liu and Pan, 2007).

Firms that record success in the implementation of the ABC model means that the model does apply in their businesses. On the other hand, for those that report inability show that the model is not appropriate for his or her cost management systems. For example, firms that contain multiple service and product provision are at a higher possibility of acknowledging this model than businesses with limited or one line of service and product provision (Dunn, 2004, p. 4). Therefore, implementation of the ABC model also runs hand in hand with the applicability of the model in the company.

In general, activity founded costing method is beneficial 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've seen how this model has been widely used and accepted by businesses in several countries and exactly how it has assisted in proper cost management. However, for the company to successfully use the model there exists need for proper execution process that guarantees the business of perfect tool of the approach. For the companies that have efficiently executed the ABC model they enjoy reduced costs, higher income levels and better management of the product associated costs. Therefore, ABC sometimes appears to be both a cost-increasing factor and a cost-reducing factor. However the benefits that arise from the model are very good much higher so that the expenses of applying the model aren't felt.

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