Sample Essay on Activity Based Costing

This is an accounting technique where costs are assigned directly to the products. It can also be defined as a managerial system where overhead costs are incorporated into direct costs of services and products. There are several benefits in using this kind of accounting system as outlined below. One of the benefits is that it allows an individual or a company estimates the exact cost of each product or service. This is a very essential step in uncovering inefficient products that reduce the profit of the company (Plowman, 2011). A company will make decisions on whether to maintain or remove the products on its product lists depending on the rate of overhead cost. Another benefit is that through this method an organization will be in a position to assign prices to different goods and services.

Those products that consume a lot of input resources will be highly priced than those that use little resources. Price is inclusive of the overhead cost that may be attributed to the finished products. Consequently, market and consumers cannot influence the pricing mechanism because it is based on a scientific pricing of the cost incurred in the manufacture of the product (Innes & Mitchell, 2013). This means that consumers will have to access the product at the available prices. The third benefit is that it enables value adding for products. Companies engage in this initiative in order to woo customers into purchasing the goods. Most of the customers focus on the value they attain after consuming the product hence price is not a determining factor when it comes to the purchasing ordeal. Lastly, tracking of costs for activities is possible while using this system. In situation where an activity uses a lot of resources with low returns, the management has to look for ways to avert the ordeal because of the financial implication brought about by the activity (Collins, 2014).

Activity based costing can be applied in a manufacturing or processing business organization that produces several products using the same product line. This involves several activities that are performed concurrently in coming up with a finished product. Therefore, the price of a product is determined by the combination of all the activities carried out. This infers that the inefficiency of an activity will affects the overall product quality. These are the critical steps that a product has to go through hence an organization stresses a lot of care in carrying out each and every activity. This facilitates the process of maintaining product quality (Anderson & Young, 2012).

References

Anderson, S. W., & Young, S. M. (2012). Implementing management innovations: Lessons learned from activity based costing in the U.S. automobile industry. Boston: Kluwer Academic Publishers.

Collins, F. (2014). Implementing activity based costing. New York, NY: Executive Enterprises Publications.

Innes, J., & Mitchell, F. (2013). A survey of activity-based costing in the U.K.’s largest companies. Management Accounting Research, 22(1), 74-91. doi:10.1006/mare.1995.1008

Plowman, B. (2011). Activity based management: Improving processes and profitability. Aldershot, Hants: Gower.