Activity-Based Costing Systems
Activity-based costing is a technique that organizations use in their daily activities of production of goods and services. Organizations use resources and incur a different cost in producing services and goods (Al-Hebry & Al-Matari, 2017). ABC systems provide a yardstick of allocating costs to individual’s processes that incur them. Therefore, cost should be allocated based on the activities they are incurred either by direct allocation or resource drivers. However, the activity-based costing system is difficult when analysis based on activity levels is needed. Moreover, many organizations fail to track these systems since they require a tedious periodical review. Additionally, organizations do not realize the benefits accruing from the usage of these operational benefits. Organizations should allow cost drivers to be addressed based on their processes in certain activity to address these shortcomings. These would keep a systemized tracking of every cost to a product.
Activity-based costing would be summarized as an accounting method essential in organizations that manufacture products in determining the total cost of producing a product. The ABC costing will assist the company with the cost estimation of various products in the production line. Additionally, the system will identify and eliminate the process that is not cost effective in the production process. Cost estimations assist the company in drawing future budgets based on ABC systems. The journal explains why product and customer costs are important in determining the overall profitability of a company. The organization will be able to set prices for its products based on how each product absorbed costs. Moreover, ABC systems will predominantly be applicable in setting strategic decisions such as material and labor outsourcing. Finally, the systems will identify areas of weakness and assist in improvement initiatives.
Refference
Al-Hebry, A.A., and Al-Matari, E.M. (2017). A Critical Study of Cost Aprpoaches in the
Accounting Thought: Conceptual Study. International Review of Management and Marketing, Vol. 7, No.3, p.105-112