University of the People **We aren't endorsed by this school
BUS 3304
Nov 4, 2023
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Steps to Implement Activity-Based Costing (ABC): Identify Activities: The first step is to identify all the activities within an organization that consume resources. Activities can be both primary (directly related to producing a product or service) and secondary (supporting activities like administration or maintenance). Assign Costs to Activities: Next, you allocate the costs associated with each activity. This includes both direct costs (easily traceable to a specific activity) and indirect costs (allocated based on drivers like time, space, or usage). Determine Cost Drivers: Cost drivers are factors that determine the extent of activity. Identify the key drivers for each activity. For example, the number of machine hours might drive machine maintenance costs. Calculate Activity Costs: Use the cost drivers to calculate the cost of each activity. This involves dividing the total cost of the activity by the total number of cost drivers. Assign Costs to Products or Services: Finally, allocate the costs of activities to the products or services that use them. This provides a more accurate picture of the cost of producing each product or delivering each service (Heisinger, K., & Hoyle, J. B. (2012). Advantages of Using ABC: Accurate Cost Allocation: ABC provides a more accurate picture of product or service costs by considering various cost drivers. This can lead to better pricing decisions. Better Decision-Making: Managers can make more informed decisions about product lines, pricing, and resource allocation, leading to improved profitability. Improved Resource Efficiency: ABC helps identify inefficient activities, leading to opportunities for cost reduction and resource optimization. Enhanced Budgeting and Planning: It helps organizations create more precise budgets and forecasts by breaking down costs into detailed activities. Cost Transparency: ABC offers greater transparency into cost structures,
making it easier to identify areas for improvement and cost reduction (Heisinger, K., & Hoyle, J. B. (2012). Disadvantages of Using ABC: Complexity: Implementing ABC can be time-consuming and complex, especially for large organizations. Resource-Intensive: It requires a significant amount of data collection, analysis, and ongoing maintenance, which can be costly. Subjectivity: The choice of cost drivers can be subjective and might vary among different users or organizations. Resistance to Change: Employees may resist changes in cost allocation methods, and it can be challenging to overcome their resistance. Limited Applicability: ABC may not be suitable for all organizations or industries, and the benefits may not justify the costs in some cases (Heisinger, K., & Hoyle, J. B. (2012). In conclusion, ABC offers a more accurate way to allocate costs and make informed decisions, but it comes with complexity and resource requirements. Its suitability depends on the organization's size, industry, and specific needs. References: Heisinger, K., & Hoyle, J. B. (2012). Managerial Accounting. Creative Commons by-nc-sa 3.0. https://open.umn.edu/opentextbooks/textbooks/managerial- accounting
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