An Introduction to the method of cost accounting Essay

Since the nineteenth century, cost accounting has been seen as a critical portion of an organisation peculiarly in fabricating industry. In the fabrication industry, about any organisation is capable of out bring forthing and out selling any of its rivals and deriving high gross and high profitableness. However, organisations found out that the most efficient fabrication method is being able to increase productiveness while cut downing costs. Therefore, bing system that provides an accurate cost computation plays a really of import function in this industry until these yearss. a comparative analysis of ABC and traditional costing.pdf

In recent old ages, cost accounting is seen non merely as a cost computation method used by organisations for mensurating its profitableness and public presentation, it is besides indispensable information that is needed by determination shapers. These yearss, with consumers demanding for better merchandises, organisations seeking the latest engineering in production, and demand for control in organisations, betterment in bing systems has been developed. The development of a costing system a historical position

Traditional costing system

Prior to 1980s, traditional costing was the costing system used by most organisations. Although traditional costing is cheaper and easy to be implemented compared to the costing system that were developed during 1990s Cost system pick and incentives traditional V ABC, it is non a suited method to be implemented by organisations in the modern economic system today. TQM and ABC

Manufacturing industry in the current economic system strive on fabrication merchandises while cut downing production clip. As such, organisations in fabrication industry has adopted fabricating constructs such as just-in-time ( JIT ) and introduced robotics into production to rush up production clip and cut down the demand for labour engagement in production. As argued by A. Gunasekaran, fabricating industry presents are more of capital intensifier instead than the traditional labour intensive fabrication manner. Application of ABC: some instances experience Hence traditional costing system which calculates costs by apportioning costs through direct labour hr footing will supply inaccurate bing information hence this system is considered unsuitable in fabricating industry presents.

As clip base on ballss, organisations in the 1980s began to seek for new bing systems that is suited for the altering economic system as they realized traditional costing system is outdated and does non accurately explicate the alterations and ingestion of costs. The development of a costing system a historical position

Activity based costing

New cost accounting system was introduced to accommodate the cost computation method needed in the developments in fabrication industry. Application of ABC: some instances experience As B. Mishra and I. Vaysman stated, “ Activity Based Costing has become the recognized redress for important restrictions of traditional cost accounting system ” , Activity Based Costing system ( ABC ) was developed to supply solution to the deformations caused by traditional costing system to the freshly developed fabrication constructs. Traditional V ABC

One advantage that ABC has is it could supply a clear image of how the concern of the organisation is being managed. It has the flexibleness of describing the type of information that is needed by direction for determination devising. Besides, ABC apportions cost harmonizing to its appropriate cost drivers which would supply direction with elaborate accurate cost computations to observe the cost of all activities. Traditional V ABC The cost information provided by the system allows organisations to expeditiously make up one’s mind on merchandise pricing and merchandise designing which if non decently valuated might take the organisation into terrible long tally losingss. ABCS: adv & A ; disadv

In visible radiation of the addition in planetary competition, ABC is seen as a costing system which will supply organisation with the most efficient cost information in the hereafter and big organisations are acknowledging its advantages. ABC: a construct whose clip has come Therefore the execution of ABC in an organisation that is non executing good due to the alterations in the current economic system can supply excess capacity to the underperforming organisation.

Many organisations have chosen to implement ABC system as its cost accounting system because of its important function in the rating and determination devising procedures of these organisations. Traditional V ABC ABC excessively has its drawbacks. Even though it is a utile system, companies are required to pay high set-up cost compared to the utilizing of traditional costing system. It is besides clip devouring and requires changeless updates due to the frequent alteration in the market. ABC at Diebold

There are organisations which implemented ABC system but are non harvesting the benefits which the system provides. One most common ground for ABC system to non work in an organisation is hapless execution procedure. Cost system pick and incentives traditional V ABC Organizations might hold rushed into implementing the ABC system or utilizing it to replace other bing method such as traditional costing system without proper planning such as corroborating the engagement of every staff in the organisation during the execution procedure and besides taking all possible effects into consideration.

Another possibility which causes organisations to neglect in implementing ABC system is directors in those organisations misuse the information provided by the costing system for the intent of self involvement. Cost system pick and incentives traditional V ABC ABC system is implemented in organisations because it generates accurate and good choice information for directors with the intent of pull offing the procedures of the organisation. However, due to the high quality and utility of the information generated by the system, directors uses all the information together with their expertness to do determination which serves them best without the cognition of the proprietors of the organisations. Therefore this has caused the organisation to endure low profitableness while the director benefits from a system implemented through the finance provided by the organisation for the public assistance of the organisation.

Besides, the ground for the profitableness of some organisations had worsen since the execution of ABC system was due to no segregation of responsibilities among the directors involved in the set up of the ABC system. Cost system pick and incentives traditional V ABC Even in the smallest of organisation, it should ever apportion a director peculiarly merely for planing the system, another whom is merely involved in supervising the execution phase of the system while one director who merely perform the responsibilities of keeping the system. This segregation of responsibilities would understate the opportunities of directors involved in direction of the system while besides the execution of the system therefore cut downing the hazard of directors misapplying the ABC system for personal benefits.

Activity Based Management

Activity Based Costing system is most normally used in fabricating industry to bring forth accurate and important cost information for the intent of determination devising. Nowadays, organisations introduced Activity Based Management ( ABM ) as a new system which benefits from the information provided by ABC. The intent of ABM is to utilize the information generated by ABC to better the public presentation of an organisation which significantly increases the profitableness of the organisation. Application of ABC: some instances experience

ABM was developed based on ABC and it can now be used non merely in fabricating industry but besides in others such as the service and the procedure industries. ABM an overview ABM benefits organisations by supplying counsel on planning, managing and controlling of its activities to accomplish the highest quality in footings of fabricating a merchandise, supplying a service, and besides fulfilling clients. ABM uses the information generated by ABC which accurately measures the allotment of costs on cost objects and activities. Hence, because ABC provides merely information while ABM helps direction in doing determination, organisations perform better through the application of both the systems. Application of ABC: some instances experience

ABM aid in determination devising procedures by indentifying the value-added and non value-added activities. It is indispensable to place and stop any non value added activities which is blowing the resources of the organisation because it does non supply any benefits to the profitableness of the organisation. Traditional V ABC

Even though ABM is considered better than the traditional costing system, it has its defects that are largely similar to ABC. One job that caused ABM to neglect in deliver the desired consequence in assisting the organisation is the complexness of implementing the system. Top direction whom failed to pass clip in acquiring to cognize the complex system frequently chose to reject the execution of ABM. Top direction rejects the system because they do non see the benefits that exceeded costs of implementing the system due to the complication of the system. Arthur Andersen lessons from ABM battleground. Hence without the engagement of top direction, the system failed to supply efficient information that the organisation requires.

Activity Based Budgeting

Budgeting is an of import direction tool used by organisations to be after, command and organize activities and besides as a public presentation measuring. The traditional budgeting system of conventional budgeting system prepares budget by seting future budget based on the fiscal public presentation of the current twelvemonth. Similar to the traditional costing system, conventional budgeting is an out-of-date system in the modern-day economic system as it would non better the budgetary procedure of an organisation because as Samuel Idowu, senior lector in North East Surrey College of Technology argues that it merely amends the old old ages ‘ budget alternatively of re-evaluating the costs incurred by the organizationin fixing for future budget. Budgeting a direction tool

Other than ABB, Zero Based Budgeting system ( ZBB ) was besides developed to get the better of some of the failings of conventional budgeting. ZBB prepares budget by critically reexamining the costs and activities that the organisation is involved in while executing budgetary processs. ZBB would take into history all the costs and benefits of funding the activities that the organisation is involved for consideration before make up one’s minding whether to budget more financess for the peculiar activities or to stop it. zero based budgeting This system overcomes the defect of conventional budgeting which organisations might budget more financess for an activity without proper consideration on the significance of how it might profit the organisation. Budgeting a direction tool ZBB is more than merely a budgeting procedure, it is besides a systematic direction procedure. Management in organisations that implemented ZBB performs planning, budgeting and operation determination devising in order to bring forth information for determination devising intents. zero based budgeting It is an advantage that the system is better than conventional budgeting because conventional budgeting merely provides budgeting information for budgeting intents while ABB