{"id":3360,"date":"2020-02-16T10:09:51","date_gmt":"2020-02-16T10:09:51","guid":{"rendered":"https:\/\/commerceiets.com\/?p=3360"},"modified":"2020-02-16T10:09:51","modified_gmt":"2020-02-16T10:09:51","slug":"activity-based-costing","status":"publish","type":"post","link":"https:\/\/commerceiets.com\/activity-based-costing\/","title":{"rendered":"ACTIVITY BASED COSTING"},"content":{"rendered":"\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_72 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/commerceiets.com\/activity-based-costing\/#ACTIVITY_BASED_COSTING\" title=\"ACTIVITY\nBASED COSTING\">ACTIVITY\nBASED COSTING<\/a><ul class='ez-toc-list-level-5' ><li class='ez-toc-heading-level-5'><ul class='ez-toc-list-level-5' ><li class='ez-toc-heading-level-5'><ul class='ez-toc-list-level-5' ><li class='ez-toc-heading-level-5'><ul class='ez-toc-list-level-5' ><li class='ez-toc-heading-level-5'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/commerceiets.com\/activity-based-costing\/#The_Activity-Based_Costing_ABC_is_a_costing_system_which_focuses_on_activities_performed_to_produce_Products_ABC_is_that_costing_in_which_costs_are_first_traced_to_activities_and_then_to_products\" title=\"The Activity-Based Costing (ABC) is a costing system, which focuses on activities performed to produce Products. ABC is that costing in which costs are first traced to activities and then to products.\">The Activity-Based Costing (ABC) is a costing system, which focuses on activities performed to produce Products. ABC is that costing in which costs are first traced to activities and then to products.<\/a><\/li><\/ul><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/commerceiets.com\/activity-based-costing\/#TERMINOLOGY_UNDER_ACTIVITY_BASED_COSTING\" title=\"TERMINOLOGY\nUNDER ACTIVITY BASED COSTING\">TERMINOLOGY\nUNDER ACTIVITY BASED COSTING<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/commerceiets.com\/activity-based-costing\/#FEATURES_OF_ACTIVITY_BASED_COSTING\" title=\"FEATURES\nOF ACTIVITY BASED COSTING\">FEATURES\nOF ACTIVITY BASED COSTING<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/commerceiets.com\/activity-based-costing\/#PROCESS_OF_ACTIVITY_BASED_COSTING\" title=\"PROCESS\nOF ACTIVITY BASED COSTING\">PROCESS\nOF ACTIVITY BASED COSTING<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/commerceiets.com\/activity-based-costing\/#OBJECTIVES_OF_ACTIVITY_BASED_COSTING\" title=\"OBJECTIVES OF ACTIVITY BASED COSTING\">OBJECTIVES OF ACTIVITY BASED COSTING<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/commerceiets.com\/activity-based-costing\/#ADVANTAGES_OF_ACTIVITY_BASED_COSTING\" title=\"ADVANTAGES\nOF ACTIVITY BASED COSTING\">ADVANTAGES\nOF ACTIVITY BASED COSTING<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/commerceiets.com\/activity-based-costing\/#DISADVANTAGES_OF_ACTIVITY_BASED_COSTING\" title=\"DISADVANTAGES\nOF ACTIVITY BASED COSTING\">DISADVANTAGES\nOF ACTIVITY BASED COSTING<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/commerceiets.com\/activity-based-costing\/#CHARACTERISTICS_OF_SUCCESSFUL_ABC_IMPLEMENTATIONS\" title=\"CHARACTERISTICS\nOF SUCCESSFUL ABC IMPLEMENTATIONS\">CHARACTERISTICS\nOF SUCCESSFUL ABC IMPLEMENTATIONS<\/a><\/li><\/ul><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h1 class=\"has-text-align-center wp-block-heading\" id=\"activity-based-costing\"><span class=\"ez-toc-section\" id=\"ACTIVITY_BASED_COSTING\"><\/span><strong>ACTIVITY\nBASED COSTING<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h1>\n\n\n\n<h5 class=\"wp-block-heading\" id=\"the-activity-based-costing-abc-is-a-costing-system-which-focuses-on-activities-performed-to-produce-products-abc-is-that-costing-in-which-costs-are-first-traced-to-activities-and-then-to-products\"><span class=\"ez-toc-section\" id=\"The_Activity-Based_Costing_ABC_is_a_costing_system_which_focuses_on_activities_performed_to_produce_Products_ABC_is_that_costing_in_which_costs_are_first_traced_to_activities_and_then_to_products\"><\/span>The Activity-Based Costing (ABC) is a costing system, which focuses on activities performed to produce Products. ABC is that costing in which <a href=\"https:\/\/commerceiets.com\/types-of-cost\/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"costs (opens in a new tab)\">costs<\/a> are first traced to activities and then to products.<span class=\"ez-toc-section-end\"><\/span><\/h5>\n\n\n\n<p><strong>ACCORDING\nTO CHARTERED INSTITUTE OF MANAGEMENT ACCOUNTANTS, LONDON<\/strong><\/p>\n\n\n\n<p>\u201cActivity Based Costing is cost attribution to cost units on the basis of benefit received from indirect activities e.g. ordering, setting up, assuring quality.\u201d <\/p>\n\n\n\n<p><strong>ACCORDING\nTO COKINS <\/strong><\/p>\n\n\n\n<p>\u201cActivity Based Costing system is the mathematics used to reassign costs accurately to cost objects, that is, outputs, products, services, and customers. Its primary purpose is for profitability analysis.\u201d<\/p>\n\n\n\n<p><strong>ACCORDING\nTO TURNEY <\/strong><\/p>\n\n\n\n<p>\u201cABC refers to a methodology that measures the cost and\nperformance of activities, resources and cost objects. It assigns costs to\nactivities based on their consumption of resources and then allocates costs to cost\nobjects based on their required activities\u201d.<\/p>\n\n\n\n<p><strong>ACCORDING\nTO THE COMPUTER AIDED MANUFACTURING-INTERNATIONALS (CAM-I) <\/strong><\/p>\n\n\n\n<p>\u201cActivity Based Costing system in its glossary as a method that measures the cost and performance of process related activities and cost objects, through the assignment of costs to activities, and cost to cost objects.\u201d<\/p>\n\n\n\n<p><strong>ACCORDING\nTO SWENSONS<\/strong><\/p>\n\n\n\n<p>\u201cActivity Based Costing system is an information system that assists with decision making, essentially a decision- support system.\u201d <\/p>\n\n\n\n<p><strong>ACCORDING\nTO CHARLES T HORNGREEN<\/strong><\/p>\n\n\n\n<p>\u201cActivity Based Costing system is a method that refines a costing system by identifying individual activities as the fundamental cost objects.\u201d<\/p>\n\n\n\n<p>Activity-based costing (ABC) is\nmostly used in the manufacturing industry since it enhances the reliability of\ncost data, hence producing nearly true costs and better classifying the costs\nincurred by the company during its production process.<\/p>\n\n\n\n<h3 class=\"has-text-align-center wp-block-heading\" id=\"terminology-under-activity-based-costing\"><span class=\"ez-toc-section\" id=\"TERMINOLOGY_UNDER_ACTIVITY_BASED_COSTING\"><\/span><strong>TERMINOLOGY\nUNDER ACTIVITY BASED COSTING<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p><strong>1. A Cost\nObject:<\/strong> It is an item for which cost measurement is required e.g.\nProduct, job or a customer. <\/p>\n\n\n\n<p><strong>\u00a02. A Cost Driver: <\/strong>In an Activity Based Costing system, the allocation basis that are used for applying costs to services or procedures are called cost drivers. It is a factor that causes a change in the cost of an activity. <\/p>\n\n\n\n<p><strong>3. Unit\nlevel cost:<\/strong> Traditionally, cost drivers were viewed only at the unit level.\nThese drivers create unit-level costs meaning that they are caused by the\nproduction or acquisition of a single unit of product or the delivery of a\nsingle unit or service. <\/p>\n\n\n\n<p><strong>4. Batch\nlevel cost:<\/strong> Costs are caused by a group of things being made, handled or\nprocessed at a single time are referred to as batch level costs. <\/p>\n\n\n\n<p><strong>5.\nProduct-level cost:<\/strong> A cost caused by the development, production\nor acquisition of different items is called a product level or process level\ncost. These include engineering change orders, equipment maintenance, product\ndevelopment and scrap, if related to product design. <\/p>\n\n\n\n<p><strong>6.\nFacility-level cost:<\/strong> Some costs cannot be related to a particular\nproduct line. These are instead related to providing a facility. For e.g. Cost\nof maintaining a building or plant security or advertisement promoting the\norganization. <\/p>\n\n\n\n<p><strong>7.\nOrganizational-level cost:<\/strong> Certain costs are incurred at organizational\nlevel for the single purpose of supporting continuing facility operations.\nThese organizational level costs are common to many different activities and\nproducts and services can be prorated among services and products on an arbitrary\nbasis only. These costs are not product related .thus they should be subtracted\nfrom net product revenues instead of an arbitrary and illogical apportionment. <\/p>\n\n\n\n<p><strong>8. Cost\nPool:<\/strong> Costs are grouped into pools according to the activities, which\ndrive them. Example: Costs associated with procurement i.e. ordering,\ninspection, storing etc would be included in this cost pool and cost driver\nidentified. <\/p>\n\n\n\n<h3 class=\"has-text-align-center wp-block-heading\" id=\"features-of-activity-based-costing\"><span class=\"ez-toc-section\" id=\"FEATURES_OF_ACTIVITY_BASED_COSTING\"><\/span><strong>FEATURES\nOF ACTIVITY BASED COSTING<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The features of Activity Based Costing are as under: <\/p>\n\n\n\n<p>\u2022 Activity-based costing (ABC) is a two-stage product costing method that first assigns costs to activities and then allocates them to products based on the each product\u2019s consumption of activities. <\/p>\n\n\n\n<p>\u2022 An activity is any discrete task that an organization undertakes\nto make or deliver a product or service. <\/p>\n\n\n\n<p>\u2022 Activity-based costing is based on the concept that products\nconsume activities and activities consume resources. <\/p>\n\n\n\n<p>\u2022 Activity-based costing can be used by any organization that\nwants a better understanding of the costs of the goods and services it\nprovides, including manufacturing, service, and even non-profit organizations.<\/p>\n\n\n\n<h3 class=\"has-text-align-center wp-block-heading\" id=\"process-of-activity-based-costing\"><span class=\"ez-toc-section\" id=\"PROCESS_OF_ACTIVITY_BASED_COSTING\"><\/span><strong>PROCESS\nOF ACTIVITY BASED COSTING<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p><strong>Step\n1. IDENTIFY RESOURCES <\/strong><\/p>\n\n\n\n<p>Resources represent the expenditure of an organization. These are the same costs that are represented in a traditional accounting, Activity Based Costing links these cost to products, customers or services. <\/p>\n\n\n\n<p><strong>Step2.\nIDENTIFY ACTIVITIES <\/strong><\/p>\n\n\n\n<p>Activities represent the work performed in\nan organization. ABC accounts for the costs based on what activities caused\nthem to occur. By determining the actual activities that occur in various\ndepartments it is then possible to more accurately relate these costs to\ncustomers, products and services. Activities comprise of units of work or tasks.\n<\/p>\n\n\n\n<p><strong>For\nexample,<\/strong> purchase of materials is an\nactivity consisting a series of tasks like purchase requisition, advertisement\ninviting quotations, identification of suppliers, placement of purchase order,\nfollow-up etc. <\/p>\n\n\n\n<p><strong>Types\nof Activities:<\/strong> Activities basically fall into\nfour different categories, known as the manufacturing cost hierarchy. These\ncategories were first identified by Cooper in 1990 and help to determine the\ntype of activity cost driver required. The categories are: <\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td>\n  <strong>Unit level activities:<\/strong> These are activities for which the consumption\n  of resources can be identified with the number of units produced. It is\n  performed each time a unit is produced.\n  &nbsp;\n  <\/td><td>\n  Use of indirect materials\/consumables.\n  &nbsp;\n  <\/td><\/tr><tr><td>\n  <strong>Batch level activities: <\/strong>The costs of some activities are driven by\n  the number of batches of units produced. These are activities related to\n  setting up of a batch or a production run. It is performed each time a batch\n  is processed.\n  &nbsp;\n  <\/td><td>\n  Material ordering, Inspection of\n  Products.\n  &nbsp;\n  <\/td><\/tr><tr><td>\n  <strong>Product level activities:<\/strong> The cost of some activities are driven by the creation\n  of a new product line and its maintenance.\n  <\/td><td>\n  Designing the product, Producing parts specifications\n  and keeping technical drawings of products.\n  &nbsp;\n  &nbsp;\n  <\/td><\/tr><tr><td>\n  <strong>Facility Level Activities:<\/strong> It must be carried out regardless of which products\n  are produced. These are activities necessary for sustaining the manufacturing\n  process and cannot be directly attributed to individual products\n  <\/td><td>\n  Plant Security, Production Manager\u2019s Salary\n  and Maintenance of buildings.\n  &nbsp;\n  <\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p><strong>Step\n3. IDENTIFY COST OBJECTS <\/strong><\/p>\n\n\n\n<p>Activity Based Costing provides profitability by one or more cost object. Cost object profitability is utilized to identify money losing customers to validate separate divisions or business units. Defining outputs to be reviewed is an important step in a successful Activity Based Costing implement action. <\/p>\n\n\n\n<p><strong>Step\n4. DETERMINE RESOURCE DRIVERS <\/strong><\/p>\n\n\n\n<p>Resource drivers provide the link between\nthe expenditure of an Organisation and activities performed within the\nOrganisation. <\/p>\n\n\n\n<p><strong>Step\n5. DETERMINE COST (ACTIVITY) DRIVERS <\/strong><\/p>\n\n\n\n<p>Determination of cost drivers completes the\nlast stage of the model. Cost drivers trace or links the cost of performing\ncertain activities to cost objects. <\/p>\n\n\n\n<p><strong>Activity\nCost Driver Rate = Activity Cost Driver \/ Total Cost of Activity(Cost pool)<\/strong><\/p>\n\n\n\n<p><strong>Step\n6. ASSIGN COSTS TO THE COST OBJECTS <\/strong><\/p>\n\n\n\n<p>The following formula can be used for\nassigning costs to the cost objects: <\/p>\n\n\n\n<p><strong>Costs = Resources Consumed \u00d7\nActivity Cost Driver Rate<\/strong><\/p>\n\n\n\n<h3 class=\"has-text-align-center wp-block-heading\" id=\"objectives-of-activity-based-costing\"><span class=\"ez-toc-section\" id=\"OBJECTIVES_OF_ACTIVITY_BASED_COSTING\"><\/span><strong>OBJECTIVES OF ACTIVITY BASED COSTING<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The objectives of Activity-based Costing\nare discussed below: <\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>To remove the distortions in\ncomputation of total costs as seen in the traditional costing system and bring\nmore accuracy in the computation of costs of products and services.<\/li><li>To help in decision making by\naccurately computing the costs of products and services.<\/li><li>To identify various activities\nin the production process and further identify the value adding activities.<\/li><li>To distribute overheads on the\nbasis of activities.<\/li><li>To focus on high cost\nactivities.<\/li><li>To identify the opportunities\nfor improvement and reduction of costs.<\/li><li>To eliminate non value adding\nactivities.<\/li><\/ul>\n\n\n\n<h3 class=\"has-text-align-center wp-block-heading\" id=\"advantages-of-activity-based-costing\"><span class=\"ez-toc-section\" id=\"ADVANTAGES_OF_ACTIVITY_BASED_COSTING\"><\/span><strong>ADVANTAGES\nOF ACTIVITY BASED COSTING<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The fundamental advantage of using an ABC system is to more precisely determine how overhead is used. Once you have an Activity Based Costing system, you can obtain better information about the following issues:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><em><strong>Activity costs<\/strong><\/em><strong><em>:<\/em> <\/strong>Activity Based Costing is designed to track the cost of activities, so you can use it to see if activity costs are in line with industry standards. If not, Activity Based Costing is an excellent feedback tool for measuring the ongoing cost of specific services as management focuses on cost reduction.<\/li><li><em><strong>Customer profitability<\/strong><\/em><strong><em>:<\/em> <\/strong>Though most of the costs incurred for individual customers are simply product costs, there is also an overhead component, such as unusually high customer service levels, product return handling, and cooperative marketing agreements. An ABC system can sort through these additional overhead costs and help you determine which customers are actually earning you a reasonable profit. This analysis may result in some unprofitable customers being turned away, or more emphasis being placed on those customers who are earning the company its largest profits.<\/li><li><em><strong>Distribution cost<\/strong><\/em><strong>:<\/strong> The typical company uses a variety of distribution channels to sell its products, such as retail, Internet, distributors, and mail order catalogs. Most of the structural cost of maintaining a distribution channel is overhead, so if you can make a reasonable determination of which distribution channels are using overhead, you can make decisions to alter how distribution channels are used, or even to drop unprofitable channels.<\/li><li><em><strong>Make or buy<\/strong><\/em><strong><em>:<\/em><\/strong> ABC provides a comprehensive view of every cost associated with the in-house manufacture of a product, so that you can see precisely which costs will be eliminated if an item is outsourced, versus which costs will remain.<\/li><li><em><strong>Margins<\/strong><\/em><strong><em>:<\/em><\/strong> With proper overhead allocation from an ABC system, you can determine the margins of various products, product lines, and entire subsidiaries. This can be quite useful for determining where to position company resources to earn the largest margins.<\/li><li><em><strong>Minimum price<\/strong><\/em><strong><em>:<\/em><\/strong> Product pricing is really based on the price that the market will bear, but the marketing manager should know what the cost of the product is, in order to avoid selling a product that will lose a company money on every sale. Activity Based Costing is very good for determining which overhead costs should be included in this minimum cost, depending upon the circumstances under which products are being sold.<\/li><li><em><strong>Production facility cost<\/strong><\/em><strong><em>: <\/em><\/strong>It is usually quite easy to segregate overhead costs at the plant-wide level, so you can compare the costs of production between different facilities.<\/li><\/ul>\n\n\n\n<h3 class=\"has-text-align-center wp-block-heading\" id=\"disadvantages-of-activity-based-costing\"><span class=\"ez-toc-section\" id=\"DISADVANTAGES_OF_ACTIVITY_BASED_COSTING\"><\/span><strong>DISADVANTAGES\nOF ACTIVITY BASED COSTING<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Many companies initiate Activity Based Costing projects with the best of intentions, only to see a very high proportion of the projects either fail or eventually lapse into disuse. There are several reasons for these issues, which are:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><em><strong>Cost pool volume<\/strong><\/em><strong><em>:<\/em><\/strong> The advantage of an Activity Based Costing system is the high quality of information that it produces, but this comes at the cost of using a large number of cost pools \u2013 and the more cost pools there are, the greater the cost of managing the system. To reduce this cost, run an ongoing analysis of the cost to maintain each cost pool, in comparison to the utility of the resulting information. Doing so should keep the number of cost pools down to manageable proportions.<\/li><li><em><strong>Installation time<\/strong><\/em><strong><em>:<\/em><\/strong> ABC systems are notoriously difficult to install, with multi-year installations being the norm when a company attempts to install it across all product lines and facilities. For such comprehensive installations, it is difficult to maintain a high level of management and budgetary support as the months roll by without installation being completed. Success rates are much higher for smaller, more targeted ABC installations.<\/li><li><em><strong>Multi-department data sources<\/strong><\/em><strong><em>: <\/em><\/strong>An Activity Based Costing system may require data input from multiple departments, and each of those departments may have greater priorities than the ABC system. Thus, the larger the number of departments involved in the system, the greater the risk that data inputs will fail over time. This problem can be avoided by designing the system to only need information from the most supportive managers.<\/li><li><em><strong>Project basis<\/strong><\/em><strong><em>:<\/em><\/strong> Many Activity Based Costing projects are authorized on a project basis, so that information is only collected once; the information is useful for a company\u2019s current operational situation, and it gradually declines in usefulness as the operational structure changes over time. Management may not authorize funding for additional Activity Based Costing projects later on, so ABC tends to be \u201cdone\u201d once and then discarded. To mitigate this issue, build as much of the ABC data collection structure into the existing accounting system, so that the cost of these projects is reduced; at a lower cost, it is more likely that additional Activity Based Costing projects will be authorized in the future.<\/li><li><em><strong>Reporting of unused time<\/strong><\/em><strong><em>:<\/em><\/strong> When a company asks its employees to report on the time spent on various activities, they have a strong tendency to make sure that the reported amounts equal 100% of their time. However, there is a large amount of slack time in anyone\u2019s work day that may involve breaks, administrative meetings, playing games on the Internet, and so forth. Employees usually mask these activities by apportioning more time to other activities. These inflated numbers represent misallocations of costs in the ABC system, sometimes by quite substantial amounts.<\/li><li><em><strong>Separate data set<\/strong><\/em><strong><em>:<\/em><\/strong> An ABC system rarely can be constructed to pull all of the information it needs directly from the general ledger. Instead, it requires a separate database that pulls in information from several sources, only one of which is existing general ledger accounts. It can be quite difficult to maintain this extra database, since it calls for significant extra staff time for which there may not be an adequate budget. The best work-around is to design the system to require the minimum amount of additional information other than that which is already available in the general ledger.<\/li><li><em><strong>Targeted usage<\/strong><\/em><strong><em>:<\/em><\/strong> The benefits of ABC are most apparent when cost accounting information is difficult to discern, due to the presence of multiple product lines, machines being used for the production of many products, numerous machine setups, and so forth \u2013 in other words, in complex production environments. If a company does not operate in such an environment, then it may spend a great deal of money on an ABC installation, only to find that the resulting information is not overly valuable.<\/li><\/ul>\n\n\n\n<h3 class=\"has-text-align-center wp-block-heading\" id=\"characteristics-of-successful-abc-implementations\"><span class=\"ez-toc-section\" id=\"CHARACTERISTICS_OF_SUCCESSFUL_ABC_IMPLEMENTATIONS\"><\/span><strong>CHARACTERISTICS\nOF SUCCESSFUL ABC IMPLEMENTATIONS<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p><strong>(1) Strong Top\nManagement Support<\/strong><\/p>\n\n\n\n<p>Without leadership\nfrom top management, some managers may not see any reason to change nor\nconsider the ABC implementation as important.<\/p>\n\n\n\n<p><strong>(2) Should Have\nCross-Functional Involvement<\/strong><\/p>\n\n\n\n<p>ABC cannot be alone\ndone by Finance or Costing Department. A well designed ABC system requires\nintimate knowledge of many parts of an organization hence involved those\nemployees who have the in-depth working knowledge and those who ae familiar\nwith the various parts of an organization\u2019s operations.<\/p>\n\n\n\n<p><strong>(3)&nbsp;ABC data should\nbe linked to how people are evaluated and rewarded.<\/strong><\/p>\n\n\n\n<p>With the implementation of the ABC, it\u2019s crucial that the evaluation of employee evaluation should derive from ABC data, it should not come out from other existing traditional costing system. Otherwise, this will send a wrong message that ABC data is unimportant and can even be ignored.<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Also Study<\/strong><\/td><td><strong>Also Study<\/strong><\/td><td><strong>Also Study<\/strong><\/td><td><strong>Also Study<\/strong><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/cost-accounting\/\">Cost Accounting<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/scope-of-cost-accounting-pdf\/\">Scope of cost accounting<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/elements-of-cost\/\">Elements of cost<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/types-of-cost\/\">Types of cost<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/material-control-in-cost-accounting-pdf\/\">Material control<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/perpetual-inventory-system\/\">Perpetual inventory system<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/pricing-of-materials\/\">Pricing of materials<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/bin-card\/\">Bin Card<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/store-ledger\/\">Stores Ledger<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/incentive-plans\/\">Incentive plans<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/overhead\/\">Overheads<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/accounting-treatment-of-idle-time\/\">Idle time<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/system-of-wage-payment-in-cost-accounting\/\">System of wage payment in cost accounting<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-time-rate-system-and-piece-rate-system\/\">Time rate vs piece rate wage system<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/cost-centre\/\">Cost Center<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/labor-turnover\/\">Labour Turnover<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/difference-between-management-accounting-and-cost-accounting\/\">Difference between management accounting and cost accounting<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/allocation-and-apportionment-of-overheads\/\">Allocation and apportionment of overheads<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-allocation-and-apportionment-of-overheads\/\">Allocation vs Apportionment of overheads<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/absorption-of-overheads\/\">Absorption of overheads<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/over-absorption-and-under-absorption-of-overheads\/\">Over absorption and under absorption of overheads<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/activity-based-costing\/\">Activity based costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-traditional-costing-and-activity-based-costing\/\">Traditional costing vs ABC system<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/reconciliation-of-accounts\/\">Reconciliation of accounts<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/unit-costing\/\">Unit costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/cost-sheet-format\/\">Cost sheet format<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/cost-sheet-vs-production-account\/\">Cost sheet vs production sheet<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/job-costing\/\">Job costing<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/batch-costing\/\">Batch Costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-job-costing-and-batch-costing\/\">job costing vs batch costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/contract-costing\/\">Contract costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-job-costing-and-contract-costing\/\">Job Costing vs Contract costing<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/process-costing\/\">Process Costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/process-costing-vs-job-costing\/\">Process costing vs job costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/joint-products\/\">Joint products<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/by-products\/\">By Product&nbsp;<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/equivalent-production\/\">Equivalent production<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/marginal-costing\/\">Marginal costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/applications-of-marginal-costing\/\">Application of marginal costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/cost-volume-profit-analysis\/\">Cost volume profit analysis<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/tools-and-techniques-of-marginal-costing\/\">Tools and techniques of marginal costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/budget\/\">Budget<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/break-even-point\/\">Break even point<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/process-of-budgetary-control\/\">Process of budgetary control<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/explain-the-advantages-and-limitations-of-budgetary-control\/\">Advantages and limitations of budgetary control<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/budgetary-control\/\">Budgetary Control<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/zero-base-budgeting\/\">Zero base budgeting<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/standard-costing\/\">Standard Costing<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/variance-analysis\/\">Variance Analysis<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-standard-costing-and-budgetary-control\/\">Standard costing vs budgetary control<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-management-accounting-and-cost-accounting\/\">Management accounting vs cost accounting<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-financial-accounting-management-accounting-and-cost-accounting\/\">Cost accounting vs financial accounting<\/a><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<div class=\"wp-block-buttons is-layout-flex wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link\" href=\"https:\/\/www.linkedin.com\/in\/kajal-mahajan-7549b2197\/\" target=\"_blank\" rel=\"noreferrer noopener\">CONNECT ON LINKEDIN<\/a><\/div>\n<\/div>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"512\" height=\"152\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-cropped-Presentation-resize-1.jpg\" alt=\"Activity Based Costing\" class=\"wp-image-4836\" srcset=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-cropped-Presentation-resize-1.jpg 512w, https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-cropped-Presentation-resize-1-300x89.jpg 300w\" sizes=\"auto, (max-width: 512px) 100vw, 512px\" \/><figcaption>Activity Based Costing<\/figcaption><\/figure>\n","protected":false},"excerpt":{"rendered":"<p>ACTIVITY BASED COSTING The Activity-Based Costing (ABC) is a costing system, which focuses on activities performed to produce Products. ABC is that costing in which costs are first traced to activities and then to products. ACCORDING TO CHARTERED INSTITUTE OF MANAGEMENT ACCOUNTANTS, LONDON \u201cActivity Based Costing is cost attribution to cost units on the basis&#8230;<\/p>\n<p class=\"more-link-wrap\"><a href=\"https:\/\/commerceiets.com\/activity-based-costing\/\" class=\"more-link\">Read More<span class=\"screen-reader-text\"> &ldquo;ACTIVITY BASED COSTING&rdquo;<\/span> &raquo;<\/a><\/p>\n","protected":false},"author":2,"featured_media":3364,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[187],"tags":[],"class_list":["post-3360","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-cost-accounting"],"_links":{"self":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts\/3360","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/comments?post=3360"}],"version-history":[{"count":0,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts\/3360\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/media\/3364"}],"wp:attachment":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/media?parent=3360"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/categories?post=3360"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/tags?post=3360"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}