Question

Research a firm in the S & P 500 that uses activity-based costing.

Answer the following questions: 500 words

1. Present an overall summary of how ABC is used in this firm. Be specific.
2. Discuss the advantages and disadvantages of ABC. Again be specific and if possible relate this information to the firm that you researched.

Answer 1

Answer to this question:-

Activity-based costing ABC is a method for assigning costs to products, services projects, tasks, or acquisitions, based on:

• The activities that go into them
• Resources consumed by these activities

ABC contrasts with traditional costing (cost accounting), which sometimes assigns costs using somewhat arbitrary allocation percentages for overhead or the so-called indirect costs. As a result, ABC and traditional cost accounting can estimate the cost of goods sold and gross margin very differently for individual products. Contradictory and uncertain cost estimates can be a problem when management needs to know exactly which products are profitable and which are selling at a loss.

Benefits of ABC?

Cost accountants know that traditional cost accounting can hide or distort information on the costs of individual products and services—especially where local cost allocation rules misrepresent actual resource usage. As a result, the move to ABC usually motivated by a desire to understand the "true costs" of individual products and services more accurately. Companies implement activity-based costing to:

• Identify specific products that are unprofitable.
• Improve production process efficiency.
• Price products appropriately, with the help of accurate product cost information.
• Reveal unnecessary costs that become targets for elimination.

Firms that use ABC consistently to pursue these objectives are practicing activity-based management ABM.

ABC Impacts the Same Accounts, But With Different Mathematics

Note that the purpose of ABC is to provide information for decision support and planning. ABC by itself usually has little or no impact on the structure of the firm's financial accounting reports (Income statement, Balance sheet, or Cash flow statement). This impact is minimal because both ABC and traditional costing ultimately assign costs to the same existing accounts. The two approaches merely use different mathematics to do so.

Note especially, however, that ABC sometimes brings improvements in reported margins and profitability. These outcomes follow when ABC reveals unnecessary or inflated costs, or when ABC shows where to adjust pricing models, workflow process, or the product mix.