Question

Explain how activity-based costing would be implemented using an ERP system. In doing that, explain the advantage of using ERP with activity-based costing.

Answer 1

Activity based costing is an approach to the monitoring of activities that involves accounting for the resource consumption and value of total outputs .It focuses on the factors that increase the cost of production.The Activity based costing (ABC) method of costing assigns indirect costs and overheads on products and services especially in the manufacturing sector. Kenton (2020) postulates that this method of costing takes into consideration the relationship between costs, overheads and manufactured goods and progressively assigning costs less arbitrary than the previous methods used in the costing process. While making it easy to assign costs, costs such as administrative and office costs still pose a challenge in their assigning. According to Labarre (2020) Enterprise resource planning (ERP) is a process used by companies to manage and integrate the important parts of their businesses. ERP software is essential to companies since they help them apply resource planning by integrating all the processes needed to run their companies with a single system.

Explanation :

A fashion in inventory fee accounting is toward activity-based costing (ABC). In ABC, “activities” associated with overhead fee technology are identified and then information are saved on the fees andon the activities. The things to do are seen as reasons (“drivers”) of the overhead costs. This view treats overhead prices as more direct than usual cost-accounting strategies have dealt with them. ABC tries to keep away from hard allocation methods in an try to assign prices greater exactly to person products. A agency the usage of ABC to provide extra correct fee allocations would be capable to decide which products have the best possible profit margin, facts that is integral in making strategic decisions on product lines. ABC is often used when competition is stiff, overhead costs are high, and products are diverse.

ERP is a management software involved in automating tasks that involve innovation and service delivery .ERP can be used to increase the efficiency of the activity based costing in that , the automation of back office functions can be done with much ease .It can be done through the replacement of the accounting software .

Using the ERP system with the Activity based accounting can be advantageous in that it allows and facilitates the prioritization of pricing for products thereby improving the customer and product profitability. It also supports performance improvement .