Question

Using a CPA firm to represent the service industry, discuss how activity-based costing could be used in that sector. Note: use at least 150 words for your original post.

Note: add citations when necessary.

Answer 1

ABC costing Method which is basically based on the criteria of precisely measuring the cost of particular product. The basis of bifurcation is the resource utilisation by particular activity in Manufacturing of particular product. Hence the resource utilised by particular product will only be charged as cost of the product. Hence chances of unutikised resource should and addition of such cost to the product is seems difficult to be added under this method of costing.

Implemetation of ABC costing system in Manufacturing industry is seems easier task as compared to it’s implemetation in service sector.

Here taking the example of CPA firm which deals in the consultancy services to the individual, firms and Corporates in different taxation, audit and accounting field.

Here decision is required to make which service field is more appropriate and profitable centre it could either be accounting, taxation or auditing. And other services like stock verification as they take up only at the end of the financial year can also be added as one of the profit centre and cost associated with the same shall be difficult to determine and such cost may be bifurcated on the basis either proportionate basis or charged within the three activity mostly among audit only because stock audit is also the part of the audit.

Accordingly, we have bufuractaed our profit centre on services basis of Accounting, taxation and auditing.

step 2: activity in these services is majntainenece of books , computation of tax and filing returns, compilation of IAR or as per statutory guidelines submission of report.

Activity or services are identified in step 2

step 3: identification of cost drivers in Book maintenance, no. Of return filed , no. Of IAR report submitted.

Charging of fees will also depends upon the turnover of each client, because low turnover company, proprietorship , partnership company can be handled by single audit assistant, where as big corporate require management discretions and meetings to assure the contracts.