Question

Why are top management support and cross-functional involvement crucial when attempting to implement an activity-based costing system?

Identify and describe Step 1 in the process of implementing activity-based costing. How does this step relate the following step.

Describe what is meant by batch-level activities. Give examples.

Answer 1

Hi Students

Please see below answer.

1.Activity Based Costing and Top Management:

on successful implementation of activity based costing. First, the initiative to implement activity based costing must be strongly supported by top level managers. Second, the design and implementation of an ABC system should be the responsibility of cross functional team rather than of the accounting department. The team should include representatives from each area that will use the date provided by the ABC system. Ordinarily, this would include representatives from marketing, production, engineering and top management as well as technically trained accounting staff. An outside consultant who specializes in activity based costing may serve as and advisor to the team.

The reason for insisting on strong top management support and a multifunction team approach is rooted in the fact that it is difficult to implement changes in organizations unless those changes have the full support of those who are affected. activity based costing changes the "rules of the game" since it changes some of the key measures that managers use for their decision making and for evaluating individuals' performance. Unless the managers who are directly affected by the changes in the rules have a say, resistance will be inevitable. In addition, designing a good ABC system requires intimate knowledge of many parts of the organization's overall operations. Top management must support the initiative for two reasons. First, without leadership from top management, some managers may not see any reason to change. Second, if top managers do not support the ABC system and continue to play the game by the old rules, their subordinates will quickly get the message that ABC is not important and they they will abandon the ABC initiative. Time after time, when accountants have attempted to implement an ABC system on their own without top-management support and active cooperation from other managers,

Ans 2. Steps in implementation in Activity Based Costing

There are below 6 steps in implementation of Activity Based Costing:-

Step 1: Activity Identification

First, activities must be identified and grouped together in activity pools. Activity pools are the supporting activities that tie in to a product line or service These pools or buckets may include fractionally assigned costs of supporting activities to individual products as appropriate during the second step.

Step 2: Activity Analysis

ABC continues with activity analysis, clearly identifying the processes which support a product and avoiding some of the systemic inaccuracies of traditional costing. ABC costing requires activity analysis, similar to the process mapping found in lean manufacturing.

This activity analysis identifies indirect cost relationships and allows assignment of some percentage of that activity to an end product directly.

Step 3: Assignment of Costs

Based on the findings of step 1 and 2, costs are assigned to an activity pool. For example, human resources costs would be assigned to indirect administrative or indirect management costs. These pools will each have some contribution to object cost.

Step 4: Calculate Activity Rates

Initial analysis may include direct labor hours, or indirect support labor. These activities must be assigned a value in real currency. All weightings must be added at this step. For instance, production labor hours should be in terms of a weighted labor rate including benefit costs.

Step 5: Assign Costs to Cost Objects

Once activity costs, pools and rates are identified and clearly defined, the next step is to assign them to cost objects. Objects are generally defined as the results offered to a customer. In both manufacturing and non-manufacturing environments, this product should have some saleable value to compare to the assigned costs.

Step 6: Prepare and Distribute Management Reports

Once ABC costing analysis is complete, that cost data should be placed in a concise and coherent manner for cost object and process owners. This communication of the costing analysis is critical to justify the cost of the analysis, as often this is not an inconsequential cost.

Ans 3. Batch Level Costing

A cost associated with a batch of items,but not directly traceable to an individual item within the batch. For example, the cost to set up a machine to run a batch of 5,000 items is a batch-level cost. This cost must then be allocated to the 5,000 items included in the batch.

Quality control and inspection is also considered a batch cost because it’s associated with a group of products not a specific one. In many cases, a quality control employee will randomly pick out a small percentage of units from a group to test them for quality assurance. Even though the employee isn’t testing every piece in the group, he or she is still testing the group as a whole.

Thus, the costs associated with quality control must be attributed to the entire batch.