Question

Once an activity-based costing system has been developed and implemented in a company, will that system be appropriate for the long term? Why or why not?

Answer 1

Activity based costing (ABC) :--Activity-based costing (ABC) is an accounting method that allows businesses to gather data about their operating costs. Costs are assigned to specific activities—planning, engineering, or manufacturing—and then the activities are associated with different products or services. In this way, the ABC method enables a business to decide which products, services, and resources are increasing their profitability, and which are contributing to losses. Managers are then able to generate data to create a better budget and gain a greater overall understanding of the expenses that are required to keep the company running smoothly. Generally, activity-based costing is most effective when used over a long period of time.

IMPLEMENTED:--

Implementing an activity-based costing program requires planning by and a commitment from upper management. If possible, it is best to do a trial study or test run on a department whose profit-making performance is not up to snuff. These types of situations have a greater chance of succeeding and demonstrating that an ABC program is worth the effort. If the pilot study yields no savings in cost, the activity-based costing system has either been improperly implemented or, it may not be right for the company.

The first thing a business must do when using ABC is set up a team charged with determining which activities are necessary for the product or service in question. This team needs to include experts from different areas of the company (including finance, technology, and human resources); an outside consultant may also be helpful.

APPROPRIATE ::-- It used to be that large corporations were the only businesses involved in activity-based costing. Not so today. Service industries such as banks, hospitals, insurance companies, and real estate agencies have all had success with ABC. But since its inception, activity-based costing has seemed to have been more successful when implemented by larger companies rather than by smaller ones.

Why or why not ::--

Companies that implement activity-based costing run the risk of spending too much time, effort, and even money on gathering and going over the data that is collected. Too many details can prove frustrating for managers involved in ABC. On the other hand, a lack of detail can lead to insufficient data. Another obvious factor that tends to contribute to the downfall of activity-based costing is the simple failure to act on the results that the data provide. This generally happens in businesses that were reluctant to try ABC in the first place.