ABC Costing Technique Embraces the Contributory Relations of Cost

Question: Discuss about the ABC Embraces the Contributory Relations of Cost Drivers. Answer: Introduction Activity-based costing (ABC) is a costing technique used to measure the expenditure and routine of activities, assets, and cost items. Particularly, resources are allocated to tasks; then the tasks are allocated to cost canters by their use. ABC embraces the contributory relations of cost drivers to tasks. Subsequently, ABM (Activity-based management) is a method that concentrates in managing tasks routinely with the aim to improve the significance that consumers realize and yields from the provision of this value. ABM embraces the examination of cost drivers, task inspection, and measuring of performance; this technique draws on ABC as its main data source. By the use of ABC data, ABM concentrates on redirecting and improving the application of resources to add the worth produced for consumers even other interested parties. In the current competitive world, entities need a dependable cost method and appropriate cost information to endure. By the use of an ABC, technique administrators will acquire perfect information on the actual cost of manufacturing products, the cost of services offered, the cost incurred in processes, activity costs, the cost of distribution channels, cost of maintaining consumer segments, contract costs, and the cost of projects. These rely upon o the examination of system costs the design of ABC and its implementation and the continuous improvement of the system. ABM installation is aimed at improving efficiency, reducing expenditure and asset employment. The system can enhance the competence of organization's resources by decreasing machine downtime, elimination of defective activities absolutely, processes and enhance the effectiveness of the company's resources. Gains from established ABM are determined by a decrease in costs, increase in revenues in the course of better resource employment and cost evasion. Literature Review Particular applications of ABM in companies today incorporate attribute analysis, making strategic decisions, benchmarking, analysis of operations, productivity/price analysis, and process enhancement. ABC/ABM systems apply numerous attributes for a particular cost. The attribute allows an entity to conduct examination on diverse dimensions of an administrative problem applying the similar essential storage of data. According to (Bjornenak Falconer, 2002: 504),the move from ABC to assess the profitability of products to ABM for management control and to support decision making has been enhanced by the increased application of ABC/M in diverse types of industry, to dissimilar functions in an organization and ABC/M complementarities to latest high-profile accountancy and managerial models. ABC and ABM techniques offer a basis and the understanding for drawing better decisions relating to prices, executive, and enhancement of goods produced and services. They applied to enhance determination cost dynamics structures used in business activities. The two techniques have principles to enable managers to comprehend the product and customer productivity and business process costs, and how to develop them. ABC/ABM applications are very efficient tools for enhancing better company performance in several areas. A company can recognize the influence the two techniques i.e. ABC and ABM if correct persons access correct information for the purpose of improving performance. In the research carried out by (Jarvenpaa, 2007; AkaranyYazdifar, 2007; Askarany et al., 2007) they indicated that ABC/ABM are crucial innovations that are mostly associated with the thinking that data provided could be extremely perfect and comprehensive than the one given by conventional costing techniques. Furthermore, these methods have achieved in enhancing decision-making and intriguing control in a better way to improve the industry administration According to the study conducted by (Bescos et al., 2002; Cohen et al., 2005) it indicates that ABC/ABM techniques are motivated by the urge of increasing consumer profitability, so as to gain correct and significant cost data for price determination or budgeting, to update cost systems, develop expenditure control and advance company processes, to achieve the current administrative requirements, to develop product effectiveness. Though the performance process has also limitations and has setbacks including resistance to change in companies; lack of proof in costs of achievement and implementation risks; nonexistence of technical knowledge required to successfully implement the techniques; the unwillingness of staff or management; lack of assurance about top management support; complexity in identification and selection of tasks; challenges when gathering information on these systems. Apart from organizations that have adopted ABC, some entities consider ABC a prospect. The study conducted by (Bescos et al., 2002; Cohen et al., 2005, Askarany Yazdifar, 2007) found out that the key reasons for opposing the implementation of these techniques could include, contentment in the currently established cost systems, failure by management support the embraced systems and lack of attention, implementing the systems is also coupled by elevated expenditure, a lot of time and extra resources are consumed. Analysis ABC system has attracted the concern from the academic and professionals from after coming up at the end of 1980's as indicated by, Bjornenak Falconer, 2002. Towards the end of 1990's and the beginning of 2000's Bjornenak and Falconer did a study about the growth of ABC/M journal in the period of 1987 and 2000. They started their study in the year 1987, being the same year that the first journal was published on ABC/M was seen. The publication created the foundation of their as they analyzed accounting literature only on ABC/M both in functional and academic study journals. ABC and ABM have been used largely in the service sector and in the production sector. The general aim of these two techniques in service companies is identical as in production companies. Managers require very accurate information relating to goods or services costs. The basic method of activity identification, activity expenditure categories and cost centers are also applicable in service sector as well as in manufacturing. ABM consists of both cost and process elements. The cost element puts forward cost information relating to resources, objects and cost elements of concern. The rationale of element is putting in place the precision of product costing, services costs and other cost elements. While, the intention of process element is presenting information relating to activities done in the organization, the reasons these activities are done and how better they are carried out. The discouraging truth about Activity Based Costing is that the implementation success is below the exp ected rate because there is a lot of failure due to poor motivation in the progress of implementation. This is as a result of poor planning and lack of initiation from the involved department. On the other hand over usage of ABC information compromises the credibility of the system While analyzing the empirical literature, we still have interested parties in ABC in the last few years supported by the publications. This sequence of publishing is coupled greatly by studies of accounting field Furthermore, from particularly consultancy firms. Research by these professionals embrace the idea that ABC encourages rationality, competence, and eventual productivity as per the study of (CarwinBouwman, 2002; JonesDugdale, 2002; Cohen et al., 2005; HooperMajor, 2007); some researchers indicated that ABC embraces value attracting effects the decisions on prices and revenue performance, ABC system enhances better pricing of goods, consumers, and markets; ABC eliminates less significant competitor pricing while in the decision making process as indicated by the study conducted by (Lere, 2000; Maiga Jacobs, 2003; Cardinaels et al, 2004) while some researchers considered that ABC technique permitted consumer satisfaction, consumer and company productivity examination as indica ted by the research done by (Helgesen, 2007, KuchtaTroska, 2007 and Namazi 2009). In addition to the positive and promotional information, some of the authors aren't convinced on the effectiveness of ABC cost scheme. This was concluded by the studies carried out by (DoschWilson, 2007; DeWayneRoberts, 2007; Stratton et al., 2009). As much as the benefits of ABC and ABM modern systems are evident, the successful application remains the constraint to achieving the benefits resulting from these management techniques. This happens partly because of debates raised that managerial accounting doesn't have qualities of its own and it's just a tool, and not an important element in the decision-making process, this concurs with the study conducted by (Loft, 1995; Granlund Lukka, 1998). Sector issues, such as those of globalized market competitions and variable macro-economic environment are rescuers of internal data accounting, as businesses aim at finding any benefits, however insignificant they are. Until when management accounting worth is categorically established, the value of the two techniques may not be realized. The core challenges organizations encounter in the process of implementing ABC differs the study of Brierley et al (2008) established that, other than Activity Based Cost adopters and those supporting implementation of the technique, some entities embraced ABC and consequently neglected it; studied ABC then discarded it; discarded ABC and in no way investigated the potential application; by no means thought of using ABC and lastly discarded ABC but put in place a system of conducting activity analysis. This is because management considers existing management accounting techniques to be functioning efficiently, expanding businesses are not geared up for ABC, as they consider the system taking a lot of time and resources to implement, individuals that don't work in the accounting department would not comprehend the system and making it impossible to recognize the benefits of the system. The study of (AlMaryani, M.A.H., and Sadik, H.H., 2012) concluded that the fact that entities, in general, make few resolutions devoid of examining costs objectively, perfect information on the costs is vital to the achievement of the majority of entities. The product types sold and wherever they are sold, and the manner in which the products are created and produced are distinctive undertakings that involve the examination of expenses. Applying inaccurate cost information, conversely, the decisions made by organizations will be wrong decisions and can hamper the performance and competitiveness. Regrettably, conventional cost techniques that allocate operational and variable costs of activities by direct expenditure including materials and labor costs can yield wrong information. Conventional cost systems apportion overhead expenditure of indirect tasks based on convention, instead of how expenses are in reality generated and this becomes the major problem. As a consequence, the expe nses of goods and services do not symbolize the demands by the product or service on the company funds. On the centrally, ABC technique provides additional perfect cost information as a result of assigning costs to objects that create the expenses and subsequently apportioning costs starting with the activities then products or services. In contrast with conventional cost methods, ABC concludes that activities lead to expenditure, unlike goods or services, subsequently goods and services simply create demand for these activities. By understanding the cost of activities, entities can recognize activities with utmost potential for reducing cost in the organization. ABC gives a more significant information encouraging entities to improve in areas including getting rid of wastage from marginal activities that are unproductive or unnecessary. Familiarizing workers at every management level as regards the philosophy and technicalities of ABC system could prove a complex undertaking. Staff ought to appreciate systematically the objectives the company wants to accomplish in the course of implementing ABC including how to apply the technique in their tasks. They should be sure that ABC can be successful and it is worth the efforts exercised. To succeed over workers, each corporation requires a perfectly crafted plan including the organization culture and operating requirements. Several operational systems are supposed to be revamped to make sure that workers fully integrate ABC technique to work activities that they don't draw back to their previous practices during stress periods. The traditional accounting systems must be removed as fast as possible. Benchmarking and motivation systems need to be included in the ABC statistics. Decision-making process on the tactical level as well as the managers concerned with decision making and the procedure of establishing them time and again must be considerably changed as well. The key rationale for dismal efforts why the techniques have not succeeded is due to failure of managers in taking the implementation steps. Practically, the steps are complex to take. The challenge biggest challenge in implementing ABC lies in integrating the system into the company's financial structure and to the quality and measurement sections. Several organizations have struggled to employ ABC as a derivative system. However, ABC cannot be established if statistics have not been incorporated into the company's typical financial reporting structure. Once ABC figures are not updated, they can't be merged books of account or will not be circulated broadly since; managers regularly withdraw and go to their conventional figures. Due to this Most organizations come up with separate ABC systems, which are implemented on separate computers. The ABC models that are separate can't be incorporated into authorized financial statements because they are intricate to sustain and typically consider the accepted accounting principles. This implies the information cannot be applied to external financial reporting. Consequently, the reports rapidly will become outdated. Conclusion The focal point of ABC implementation is on correct information about the true product costs, cost of services, processes costs, the cost of organizational activities, distribution channel costs, the cost of maintaining consumer segments, contract costs, and project costs. The study of (Patiar, A., 2016) also indicated that ABM makes this cost and operating information valuable by enhancing value breakdown, cost drivers, and performance measurement to instigate, drive or maintain expansion efforts and in improving decision-making process. While the system is used in a single examination of products' overheads, ABC can create a huge difference. But once a corporation has incorporated ABC to its conventional financial systems, then Activity Based Costing information becomes the performance measure, then the system considerably changes in the manner a company's employees assume. Hence, the standard value of decisions implemented regularly will be immensely higher compared to previously implemented decisions. If it happens in this manner, you are sure the company's performance will become better. Putting in place an activity based costing system can be costly and consume a lot of time. At the same time reports of this system contains information that varies from the conventional systems. It is possible too that the information from some of these systems may not be applicable in decision making processes in the organization. Such situations include; inability of ABC to conform to standards of accounting means the data from ABC cannot be applied for external reporting. This is due to the difficulty in interpreting the ABC figures. Because the process of harmonizing the figures is difficult, the company can use a software to harmonize these figures and in integration of ABC to the system of the company. ABC/M systems improve business processes through apportionment of costs on the basis of product cost drivers or the element leading to the cost of the product. This creates a lead on which products are profitable than the rest, such that the nonperforming products can be improved. It can also be applicable in determining the products that are not valuable and optimal allocation of resources to the effective and most profitable centers. ABC can also be used in in value addition to the continuous advancement of business processes. The activity based costing system accounts for expenses in the same manner that production is done allowing businesses to better comprehend where overheads are allocated to. ABC data can examine and discover wasteful products and expenses that are not necessary such that resources can be used optimally. The system can also be used to in price harmonization of the products therefore improving the quality of the products and services generally as the details of the system are improved in general. This is due to the fact that ABC is fundamentally used to improve the available chances and determine the accrued profits of productivity initiatives and enhances accountability in the allocation of resources in the organization. Companies that have implemented ABC techniques are willing to do away with traditional systems due to the successful rollout and inspiration of the end users to make use of the ABC/M systems and information in their decision making process and cost analysis. Therefore most companies require a calculated approach I order to encourage acceptance by the users. In the event that companies take step by step approaches, to understand and measure their productivity, they will discover that they create enough revenue from a few significant customer base. Therefore, it is important for firms to focus on departmental costs and improve the workers motivation such that they increase their efforts. References AlMaryani, M.A.H. and Sadik, H.H., 2012. Strategic management accounting techniques in Romanian Companies: some survey evidence. Procedia Economics and Finance, 3, pp.387-396 Brierley G, Fryirs, K. Cullum, C, Tadaki, M., Huang, H. and Blue, B., 2013. Reading the Landscape: Integrating the theory and practice of geomorphology to develop place-based understandings of river systems. 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