Activity Based Costing Essay Research Paper The — страница 2

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termination of varying product lines. Product lines have become more complex. Product lines of past were much simpler. For example, the Model T Ford came in one style and one color, black. Today, Ford cars have many different colors and styles. These different styles all have different cost drivers and activity centers. ABC illuminates hidden costs when high volume sales are not present and product differentiation is. This is advantageous because unprofitable lines can be replaced with lines that are profitable. Not many years ago, labor comprised 25 to 50 percent of a product’s cost. However, since the 1960s, labor is increasingly less involved in the production process. For example, the textile industry replaced 100-year old shuttle looms for European air-jet looms, doubling

output with less labor. In steel, the Nucor corporation used continuous casting machines to yield labor costs of $60/ton verses traditional steel’s $130/ton. Labor cost today is infrequently the driving force behind costs it was during the development period of cost accounting (1930’s). Instead, indirect costs have replaced labor as the dominant portion of costs for some products (Kelly, 1991). To use labor as the major basis for allocating as job costing or process costing accounting does, may lead to inaccurate decisions by management. Cons The accounting profession has largely overlooked ABC. Among reasons cited for low adoption were employee resistance and the organizational changes essential with the use of ABC (Ness & Cucuzza, 1995). Some trace the source of

hindered adoption of ABC to technical as well as cultural issues. Others feel that ABC would be more widespread in industry if it were marketed better by the accounts themselves (Brausch, 1992). There are several reasons for ABC low adoption rate. Complexity is an obstacle to implementing ABC. ABC requires detailed records of the costs associated with producing products and services as compared to traditional methods. This detailed record keeping requires more effort from the accountants and is more time consuming. The complexity of ABC can contribute to more errors. ABC can require more time to check and recheck to uncover errors. ABC generally requires more effort on the part of the accountant verses traditional methods and reduces the adoption rate of ABC. Another reason for

not using ABC is the increased economies of scale. Many corporations are standardizing their products to reduce the costs to manufacture them. For example, Coca-Cola distributes its products in many different countries. The product varies very little in respect to packaging and manufacturing. Traditional methods of accounting can assign costs more easily, quickly and accurately for those products that have little or no product variation. Conclusion ABC is a valuable tool in calculating the costs of producing varying product lines. These differing product lines require more extensive accounting practices than traditional costing methods provide. The information obtained from ABC can help promote product lines that managers feel are profitable between those which should be

eliminated. Labor is less frequently the major ingredient in the production process. ABC addresses this concern by examining and illustrating the overhead costs associated with particular activity centers. ABC describes these over head costs more accurately and is beneficial when increasingly more complex manufacturing processes are used. Adoption issues should be addressed to implement ABC method when costing decisions matter to managers. Brausch, J.M. “Selling ABC: New Cost Systems Can Flounder if They Are Not Marketed.” Management Accounting, February 1992, pp. 42-46. Geishecker, M.L. “New Technologies Support ABC. “Management Accounting, March 1996, pp. 42-48. Kelly, K. “A Bean-Counter’s Best Friend.” Business Week, October 25, 1991, pp. 42-43. Ness, J.A. and

T.G. Cucuzza. “Tapping the Full Potential of ABC.” Harvard Business Review, July/August 1995, pp. 130-131. Selto, F.H. and D.W. Jasinski. “ABC and High Technology: A Story with a Moral.” Management Accounting, March 1996, pp. 37-40. 17