In order to determine the subsequent steps to be taken by an organisation, it is necessary to understand how an organisation got to the position it is currently at. Unless fully understood, the organization will continue to operate in a fixed direction irrespective of whatever decisions are imposed upon it. It is therefore appropriate to look at a case study of a certain type, so that, through analysis, generalisations may be made that will be applicable to other cases of a similar nature.
Suppose, XYZ Co Ltd is an SME in the clothing and textile industry based in India which started its operations in the year 2000. Currently, it is in a partnership with a retailer for whom it manufactures men’s formal and casual wear.
The biggest revenue …show more content…
The direct labour and direct materials cost are calculated according to amount of labour employed and material consumed for production respectively. The cost incurred and the profit realised are systematically calculated by adding Rupees 0.50 to each unit, irrespective of the type of the product.
Table V represents the total costs incurred at XYZ. If for example, we now take a single product line (Table VI) – trousers (50per cent of activity). The cost structure is evident in Table VI. Under ABC – direct labour and production overheads would be allocated by level of activity. Table VII applies the ABC process to trouser manufacture. The cost allocation is given in Table …show more content…
Limitations of ABC/ABM
Though ABC/ABM give a better understanding of the cost behaviour of an organization, it has the following limitations:
• The cost of implementing the process of ABC is high due to an increase in the number of employees required to deal with the resulting additional information
• Problems in identification of the actual source of cost leading to under costing of complex drivers and over costing of simple ones.
• It concentrates more on costs rather than on activities that should actually be performed.
• Some critics argue that ABC does not effectively control costs and it is only virtually made to look superior since there are no alternatives to conventional absorption costing.
CONCLUSION
ABC/ABM enables firms to focus on its activities and products; it traces cost‐to‐cost drivers, for example, the number of machinists needed to produce trousers. The business then understands; its business processes in detail; the cost of process failures; the relationship of processes to customers; the profitability of customer segments; and the affordable amount that can be spent on influencing the preferred customer
Suppose, XYZ Co Ltd is an SME in the clothing and textile industry based in India which started its operations in the year 2000. Currently, it is in a partnership with a retailer for whom it manufactures men’s formal and casual wear.
The biggest revenue …show more content…
The direct labour and direct materials cost are calculated according to amount of labour employed and material consumed for production respectively. The cost incurred and the profit realised are systematically calculated by adding Rupees 0.50 to each unit, irrespective of the type of the product.
Table V represents the total costs incurred at XYZ. If for example, we now take a single product line (Table VI) – trousers (50per cent of activity). The cost structure is evident in Table VI. Under ABC – direct labour and production overheads would be allocated by level of activity. Table VII applies the ABC process to trouser manufacture. The cost allocation is given in Table …show more content…
Limitations of ABC/ABM
Though ABC/ABM give a better understanding of the cost behaviour of an organization, it has the following limitations:
• The cost of implementing the process of ABC is high due to an increase in the number of employees required to deal with the resulting additional information
• Problems in identification of the actual source of cost leading to under costing of complex drivers and over costing of simple ones.
• It concentrates more on costs rather than on activities that should actually be performed.
• Some critics argue that ABC does not effectively control costs and it is only virtually made to look superior since there are no alternatives to conventional absorption costing.
CONCLUSION
ABC/ABM enables firms to focus on its activities and products; it traces cost‐to‐cost drivers, for example, the number of machinists needed to produce trousers. The business then understands; its business processes in detail; the cost of process failures; the relationship of processes to customers; the profitability of customer segments; and the affordable amount that can be spent on influencing the preferred customer