Benefits of Activity Based Costing Essay Example for Free

Benefits of Activity Based Costing Essay In order to make a profit on production, the firm would have to charge a price that is greater than the cost of production. Generally, the cost of production is understood to be the cost of producing a good plus the cost of transportation to the consumer. In order to stay in business, and therefore, to avoid losses at all possible costs – the firm must cover all costs related to the production of the good and include all costs to deliver the same to the consumer at a price that is higher than the cost of production. The operating or overheard expenses of an enterprise are generated by its activities to perform its business and/or manufacturing processes successfully. As its name implies, activity based costing relates the costs facing the enterprise to its various activities. By so doing, this system of costing provides pretty accurate information about costs, allowing businesses to effectively manage their overhead expenses in order to increase their revenues (Cooper, 1988). It is but commonsensical that companies may work on cutting their costs once they know what is driving these costs. By improving their processes in order to cut costs, businesses may realize greater profits than before. What is more, by identifying high costing activities needed to produce certain goods or serve certain customers, companies may decide to focus instead on low costing products or customers by reducing their production of or service to high costing products or customers. In this way, they may shift their focus to products or customers that are more profitable to produce or to serve. Thus, management experts cite the following benefits of activity based costing as opposed to traditional methods of costing: Identifying the most and least profitable customers, products and channels. Determine the true contributors to— and detractors from—financial performance. Accurately predict costs, profits and resource requirements associated with changes in production volumes, organizational structure and resource costs. Easily identify the root causes of poor financial performance. Track costs of activities and work processes. Equip managers with cost intelligence to drive improvements. Facilitate better Marketing Mix. Enhance the bargaining power with the customer. Achieve better Positioning of products. (â€Å"Activity Based Costing,† 2008). Businesses that benefit the most from activity based costing are those with high manufacturing operating expenses or overhead costs. These costs may result from a diverse range or products, intensity of capital, or vertically integrated system of manufacturing. Activity based costing may help such businesses not only to understand but also to control their operating expenses so as to increase their revenues (O’Guin, 1991, p. 76). Organizations with large marketing, sales or distribution costs may also reap great benefits from activity based costing. As mentioned previously, this method of costing identifies those customers that are most profitable from those that are least profitable. This provides insight to management on how to improve operations. With activity based costing, such businesses may be able to answer questions such as: â€Å"What discounts are appropriate for large orders? What size accounts should salespersons no longer call on? How effective is advertising to different markets? † (O’Guin, p. 76). Firms that are experiencing sluggish or low profitability on increasing sales may be suffering from growth that is unmanaged. It may very well be that these businesses are selling products at losses to a number of customers. The accounting system of accurately measuring costs, that is, activity based costing, would allow these firms to determine which of their customers and products are generating revenues and which are not (O’Guin, p. 76). O’Guin describes another benefit of the activity based costing system thus: Even with a diverse product line or customer base and very high profitability, a company lacking an ABC system is surprisingly vulnerable. Product profitability probably varies widely across the company. Highly profitable products present an irresistible target to new market entrants. Management should know which products are reaping enormous margins, so they can erect barriers to entry. (p. 76). Also according to O’Guin, the activity based costing system provides not only strategic but also tactical benefits to businesses that implement it. Whereas benefits that are strategic in nature may be realized only once in a blue moon, for the simple reason that organizations cannot be expected to change their pricing, business operations, distribution or manufacturing processes each year – tactical benefits may be realized constantly. Indeed, activity based costing could help businesses not only with reduction of overhead costs, but also just-in-time support, improvement of quality, decisions about design, and investment in capital. Thus, businesses that implement the activity based costing system may improve their profitability on an ongoing basis (O’Guin, p. 76). In the twenty first century, companies that have a competitive edge are those that maintain flexibility, a trend that has been recognized as a critical factor for success since the 1990s. Life cycles of products have been shortened and focus on the customer has become increasingly important. As economies of scale virtually disappear, manufacturing plants that are successful are those that are able to quickly introduce innovative products and economically produce small quantities. Activity based costing system can help businesses tremendously to achieve these goals. What is more, this system of costing could assist businesses of the twenty first century to achieve their goal to increase employee motivation. With the activity based costing system in place, employees increase their understanding of business activities and therefore their involvement in business operations. So, for example, whenever they see a mound of papers they would see overhead costs, leading them to the following questions: Why do we have so many bills? Why are there so many process involved in our purchase orders (O’Guin, p. 76)? Thus, the activity based costing system encourages businesses to push their rates of cost drivers down. This helps in the reduction of time to setup, streamlines buying, in addition to time taken to development a product. When costs are attached to each of these processes or activities, management may not only measure but also plan improvement (O’Guin, p. 76). As mentioned before, some of these improvements may entail reducing production of goods or service to customers that cost more to produce or service than the others. Hence, the activity based costing system may also lead the business that implements it to improve upon its marketing mix or positioning of its products. If products and customers that cost more than the others are required by the company to produce or serve in the same quantity as before, however, activity based costing system helps the organization to improve its processes in order to decrease its costs without reducing the quantity to produce or serve. After all, it is only possible to improve inefficient processes. Because activity based costing allows the company to weigh the costs of activities against their benefits, firms that use it are in a great position to increase the efficiency of all of their processes so as to gain competitive advantages. References Activity Based Costing. (2008). Value Based Management. Retrieved Jan 27, 2009, from http://www. valuebasedmanagement. net/methods_abc. html. Cooper, R. (1988, Summer). The Rise of Activity-Based Costing – Part One: What is an Activity-Based Cost System? Journal of Cost Management, pp. 45-54. O’Guin, M. C. (1991). The Complete Guide to Activity-based Costing. Chicago, IL: CCH Tax and Accounting. Benefits of Activity Based Costing. (2016, Jul 29).

Early Childhood Disabilities Program Case Study

Early Childhood Disabilities Program - Case Study Example The research for this report was mainly secondary and qualitative since primary research is restricted by time constraint for this report. The data was mostly collected from secondary literature and books and was based on information which was already available. Books and internet were the two main sources for data collection. An outline of the project management with an overview of its key elements is covered in this report. Although there is an abundance material available on the topic, this report is restricted to the work made available by authors on the topic of project management. The topic is broad and the information available from internet sources is limited therefore it is beyond the scope of this research to cover every aspect of project management. The selected information is applied only to a particular organization in Kuwait. Project management is defined by the Project Managements Institute (PMI) as 'a temporary endeavor undertaken to produce a unique product, service or result' (Lewis, 2006). In his book Fundamentals of Project Management (2006) , Lewis describes a project as being a onetime endeavor having a definite beginning and end , a budget, a defined scope of the work which needs to be done and the performance requirements which have to be met. The integration of processes such as, initiating, planning and executing, monitoring and control, and closing, results in project management. According to Lock (2007) before a project can be initiated, it is important to clearly establish its requirements, document them and to understand them. The first stage of project management requires the project to be defined. He also states that a project cannot be expected to be successful unless the requirements are adequately defined and documented. This includes the development of a feasibility report, which appraises the technical, logistic, environmental, commercial and financial aspects which may impact the project (Lock, 2007). The purpose of the feasibility is to ensure that the project is headed in the right direction and lets investors can make their decisions based on expert advice. Initiation also involves developing checklists which ensure that no important activity is left out in the process of project evaluation. After the requirements are established, the project scope needs to be determined (Lock, 2007). Legal consideration, contracts and negotiations with vendors and customers, quality control and termination are all a part of the project initiation and execution (Cleland & Ireland, 2004). Project management includes the planning activities such as development of goals and objectives, development of WBS, schedule for work, control and evaluation. According to Lewis (2006) at a basic level a project management planning includes: A project statement Project mission statement Project objectives Project work requirement with all the

Advanced Managerial Accounting Report Essay Example | Topics and Well Written Essays - 250 words - 4

Advanced Managerial Accounting Report - Essay Example Both articles illustrate the advantages associated with using target costing. The project phases of the M-Class project were concept phase, risk and opportunities, project realization, goal oriented, and production phase. At Mercedes Benz the usage of target costing was first brought to the company by the engineering staff, not the accountants. A company that was mentioned in article 8.1 was Olympus. This company made the change from cost targets to target costing. At Mercedes Benz target costing was a logical choice because the company was designing the product from scratch and at the same time it was introducing a new production facility. To be successful with target costing companies have to consider a variety of factors including price led costing, customer orientation, focus on product and process design, cross functional teams, life cycle cost reductions, and value chain