Activity Based Costing System
Monica Meneses
Patten University
Activity Based Costing System 1
Abstract
Activity based costing is an accounting method that identifies the activities that a business performs, and then assigns indirect costs to products. An activity based costing (ABC) system recognizes the relationship between costs, activities and products, and through this relationship assigns indirect costs …show more content…
Omega Company is growing; their production has expanded with the addition of several varieties of snacks which has increased their sales and order processing department and several of their other departments have also been expanding in order to keep up with their productivity. With this type of diversity increase traditional costing becomes less reliable. Companies that have a lot of overhead expenses need a more reliable method to allocate the overhead costs to different products. If a company uses incorrect costing to allocate costs it may run the risk of pricing its products incorrectly which may affect its competitive position. Another disadvantage of using the traditional costing method is that the system has become outdated. Computers are being used instead of people especially when it comes to the manufacturing process. This leads into the fact that Omega Company would need a system that can keep up with their growth and will make the transition from their current cost system seamless.
Activity based costing (ABC) is a method for allocating overhead more precisely to those items that actually use it. ABC works best in complex environments, where there are many machines and products, and tangled processes that are not easy to sort out. Ultimately, it is of less use in a streamlined environment where production processes are abbreviated. There are several steps of activity …show more content…
The time to install the system is long. Implementing the ABC system can take a few years and they can be difficult to install. This in turn can affect the company’s budget. Another financial challenge is that the ABC system may require data from multiple departments which means that those other departments will have to stop current production in order to comply with the implementation or depending on the urgency overtime may need to be offered. Moreover many ABC projects are authorized on a project basis so that information is only collected once therefore if the information is not collected in a timely manner management may not authorize funding for additional ABC projects later
Monica Meneses
Patten University
Activity Based Costing System 1
Abstract
Activity based costing is an accounting method that identifies the activities that a business performs, and then assigns indirect costs to products. An activity based costing (ABC) system recognizes the relationship between costs, activities and products, and through this relationship assigns indirect costs …show more content…
Omega Company is growing; their production has expanded with the addition of several varieties of snacks which has increased their sales and order processing department and several of their other departments have also been expanding in order to keep up with their productivity. With this type of diversity increase traditional costing becomes less reliable. Companies that have a lot of overhead expenses need a more reliable method to allocate the overhead costs to different products. If a company uses incorrect costing to allocate costs it may run the risk of pricing its products incorrectly which may affect its competitive position. Another disadvantage of using the traditional costing method is that the system has become outdated. Computers are being used instead of people especially when it comes to the manufacturing process. This leads into the fact that Omega Company would need a system that can keep up with their growth and will make the transition from their current cost system seamless.
Activity based costing (ABC) is a method for allocating overhead more precisely to those items that actually use it. ABC works best in complex environments, where there are many machines and products, and tangled processes that are not easy to sort out. Ultimately, it is of less use in a streamlined environment where production processes are abbreviated. There are several steps of activity …show more content…
The time to install the system is long. Implementing the ABC system can take a few years and they can be difficult to install. This in turn can affect the company’s budget. Another financial challenge is that the ABC system may require data from multiple departments which means that those other departments will have to stop current production in order to comply with the implementation or depending on the urgency overtime may need to be offered. Moreover many ABC projects are authorized on a project basis so that information is only collected once therefore if the information is not collected in a timely manner management may not authorize funding for additional ABC projects later