The purpose of this paper is to present the use of activity-based costing (ABC) approach as an alternative option to the traditional cost accounting system. The…
The purpose of this paper is to present the use of activity-based costing (ABC) approach as an alternative option to the traditional cost accounting system. The contribution of this study is to demonstrate, through a simple example, the application of that costing system in a service (maintenance) industry, i.e. the paper intended to develop a procedure for a cost model that help in calculating any maintenance job cost, to a reasonable degree of accuracy, based on the actual activities performed.
This research uses a simple example whereby hypothetical activities and cost data of maintaining an injector and a pump, of an internal combustion engine, are used, presented and analyzed based on the use of the developed procedure.
ABC system provides more accurate cost estimates rather than the traditional “order costing” methods that uses unit-level costs which are variable in relation to change in service volume. Traditional cost methods distort the costs by applying overhead uniformly over different jobs of varied complexities and activities scope. On the other hand, ABC is a useful means to distribute the overhead costs in proportion (fairly) to the actual activities performed in a specific job and, hence, enhance the rationality of decision making, i.e. will not distort the accounting information used for cost reduction, pricing, and evaluation matters. The results obtained from the analysis showed that allocating costs to the maintained injector decreased from $83.55 to $71.95 and, finally, to $67.57 when using the workshop-wide, two-stage and ABC overhead allocation methods, respectively; while that of the pump increased from $298.90 to $340.34 and, finally, to $359.48 when using the same three methods, in the same order, respectively. The result is quite fair when considering the complexity of the fuel pump, in terms of design and maintenance, when compared with the injector. Notice that using volume to allocate overhead costs results in over costing high-volume products, e.g. injectors (simple in terms of design and operation) and under costing low-volume products, e.g. pumps (more complex in terms of design and operation). The paper recommends to use ABC as a more accurate and fair method when charging maintenance job orders based on the analysis of costing two maintained items in the same premise while consuming different overhead resources.
This study attempts to analyze different methods to calculate a specific corrective maintenance job order. It strives to remedy the drawbacks of the traditional overhead costing of a job order when using principles related to the size of service, such as the direct labor cost/hours, as an allocation base. Consequently, the study proposed a new costing method, i.e. application of ABC. The traditional costing approach is considered by many firms as the best costing method. Nevertheless, it allocates overhead cost over job performed uniformly (equally) not differentiating between the complexity of the job and variety of the activities performed, e.g. using the same allocation base for “oil change” and “fuel pump adjustment” activities. So, ABC prevents cost distortions (unfairness) that could not be prevented by traditional cost accounting system. The author believes that the method presented in this paper will provide a useful management tool for costing maintenance jobs based on the appropriate selected activity drivers in maintenance workshops. The method could be applied for costing maintenance activities in maintenance of all industrial sectors.
The use of traditional costing method has proven to be distorted by applying overhead uniformly over different jobs of varied complexities and activities scope. In this paper the authors strive to present an effective costing alternative that outperforms the traditional ones with regard to overhead allocation. The paper aims to find reliable and fair maintenance costing method, i.e. to find out the relationships between maintenance activities and cost drivers. Although, ABC is widely used in manufacturing industry, no application or current research has presented an applicable thorough worked-out example, with the exception, to the author’s knowledge, of one in the aeronautical industry, to implement ABC method in maintenance industry. The importance of using this method comes from the fact that it provides, relatively, accurate and fair maintenance bills that provide customer satisfaction and firm good image. Hence, the paper is relevant in this respect and intended to contribute to the practice of maintenance management.
Better managerial control in terms of decision making and understanding the total costs of a system or service result from allocating indirect costs. Allocation requires a…
Better managerial control in terms of decision making and understanding the total costs of a system or service result from allocating indirect costs. Allocation requires a three‐step process of selecting cost objectives, pooling related overhead costs, and selecting costs bases to connect the objectives to the pooled costs. Allocation may be simple, relying on a single base, or activity‐based costing (ABC), relying on multiple bases. Contrasts the methods of allocation, and argues that ABC may be more useful for costing electronic services.
The essential investments in new product development (NPD) made by industrial companies entail effective management of NPD activities. In this context, performance…
The essential investments in new product development (NPD) made by industrial companies entail effective management of NPD activities. In this context, performance measurement is one of the means that can be employed in the pursuit of effectiveness.
As the manufacturing environment moves to computer‐integrated manufacturing and the products that are manufactured are diverse, conventional cost systems can report seriously distorted product costs. Discusses the solutions to these problems. Activity‐based costing, initiated and popularized by Robin Cooper and Robert S. Kaplan, can solve these distorted problems. Activity‐based costing (ABC) is defined as “the collection of financial and operation performance tracing the significant activities of the firm‐to‐product cost”. Discusses the ABC system design and ABC implementation. The five steps in the design of an ABC system are: aggregate actions into activities; report the cost of activities; identify activity centres; select first‐stage cost drivers; and select second‐stage cost drivers. The implementation plan consists of seven phases: an ABC seminar; a design seminar; design and data gathering; progress meetings; an executive seminar; result meetings; and interpretation meetings.
Aims to increase the knowledge about benefits and drawbacks when aservice firm implements activity‐based cost systems as a managerial toolfor calculating the costs of…
Aims to increase the knowledge about benefits and drawbacks when a service firm implements activity‐based cost systems as a managerial tool for calculating the costs of different services. States that an activity‐based costing system has its starting‐point in a customer′s total perceived service quality as the needs of the customers must be met; otherwise the service firm is unable to produce the right services at the right quality level. Claims that in service firms a common problem is that overhead costs are extensive and that it is difficult to allocate costs to the right services as many activities must be carried out to produce a service. States that in some service firms it is, however, quite easy to trace costs to the right service, e.g. a bookkeeping firm.
In present day manufacturing organizations, performance measurements play an important role in providing strategic directions and developing corresponding operational policies and methods. One such method is the activity‐based costing (ABC) method which calculates the cost of activities and helps in making decisions on product mix and price for improving the utilization of resources and minimizing the cost of production. Even now some manufacturing organizations employ traditional costing methods depending upon their market forces and characteristics. One of the most important decisions to be made is about the type of costing system that would be suitable for an organization. The role of direct labour in current manufacturing environments has diminished, but at the same time the level of support services has increased. Traditional methods of cost calculation do not take into account this increased complexity and still allocate overhead costs by their diminishing labour base or even do not take into account overhead costs. Hence, there is a need for a more accurate product costing method, viz. ABC. Discusses the application of ABC and some case experiences (for commercial reasons, the original identity of the companies is concealed) with the objective to provide information on whether the system would be applicable and under what circumstances it is better suited for improving the overall operational effectiveness of an organization.
Prior work has focused on the impact of using alternative bases for allocating costs to products but there has been little work that evaluates the use of alternative…
Prior work has focused on the impact of using alternative bases for allocating costs to products but there has been little work that evaluates the use of alternative allocation bases for allocating costs to departments. In particular, if different departments of a multi‐national firm are located in settings with different reporting requirements, exchange rate risks, and costs of capital, then the choice of cost allocation base can be important. This paper examines the economic impact of alternative service department allocation bases in a decentralised setting. A non‐linear programming (NLP) approach is used to model the problem. A review of prior literature identifies a method, based on the NLP approach, for determining the economic impact of alternative allocation bases in a multi‐product setting. The method is adapted in this paper for the multi‐divisional context. The study finds that centralised production volume decision‐making is superior to decentralised decision‐making using either revenue or volume‐based cost allocation bases. Under certain conditions, revenue‐based allocation bases are also found to be superior to volume bases. Under the assumptions of the model no distinction can be made between the centralised solution and a profit‐based allocation regime. A practical implication of this study is that designers of cost allocation systems need to consider not only the direct income‐shifting effect of different cost allocation bases but also the indirect economic effect of consequential changes in the operating decisions of the firm.
The technique of ABC has been widely adopted by universities in the UK, with the assumption that the more accurate identification of costs makes them more manageable. It…
The technique of ABC has been widely adopted by universities in the UK, with the assumption that the more accurate identification of costs makes them more manageable. It is the purpose of this paper to consider this question of manageability through identification and allocation in the university sector and to question this as a basis for decision making and resource allocation. The type of costing systems in place in an organisation must meet the needs of the organisation as a whole and there are a number of factors that will affect the type of costing system that is required and there are a number of costing systems that can be used. This paper considers the use of ABC within a university and whether school costing and course costing can meet the requirements of a university facing a challenging business environment where a significant amount of pressure is being exerted on the financial stability of some universities. In doing so the ability of ABC to satisfy the informational requirements of a university is called into question.
Examines the recent debate concerning traditional versusactivity‐based approaches to management accounting information ingeneral and product costing/pricing decisions in…
Examines the recent debate concerning traditional versus activity‐based approaches to management accounting information in general and product costing/pricing decisions in particular. Tests the relevance of activity‐based costing techniques in a real‐life manufacturing environment – pharmaceutical products. Examines the impact on product costs of changing to an activity‐based overhead allocation environment. The pilot results were sufficiently encouraging to suggest improved management information arising from a full‐scale implementation.