- June 29, 2020
Summary on the Introduction to Activity-Based Costing
on the Introduction to Activity-Based Costing
Summary to the Introduction to Activity-Based Costing
Overview of Case
Traditional costsystems are incapable of addressing the complexities ofmulti-production processes (Kaplan & Anderson, 2013). Thesesystems use unit-level cost drivers, such as units produced, machinehours, direct labor dollars, and direct labor hours (Kaplan &Anderson, 2013). On the other hand, activity-based cost systemsprovide more accurate information about business processes. Thelatter systems also identify the customers, services, and productsserved by business activities. In many instances, ABC systems analyzecost behavior in institutions by focusing on organizationalactivities (Kaplan & Anderson, 2013). In this regard,activity-based costing systems link the firm’s expenditure onresources to the business processes and activities performed by theseresources.
Identificationand Financial Impact of Key Root Cause(s), Costs Driver(s), and Costof Poor Quality issues
A cost driverrefers to the quantitative measure of the output derived from aparticular activity. Some of the activity cost drivers include thenumber of machine hours, engineering change notices, maintenancehours, new products introduced, products, material receipts,production runs, and setup hours (Öker & Adıgüzel, 2016).Furthermore, activity cost drivers can be classified intotransaction, duration, and intensity or direct charging. Transactiondrivers record how often an organization performs a particularactivity. Duration drivers show how much time is spent to complete aprocess. On the other hand, intensity drivers reveal the amount ofresources used whenever the organization performs an activity.Notably, the latter measures are the most accurate during theestimation of costs. However, the high-quality nature of intensitydrivers makes them expensive to implement. Besides, the organizationmust consider the financial impact of supporting existing customers(Öker & Adıgüzel, 2016). Many problems arise due to theuncertain nature of costs incurred for a particular activity.Organizations may also experience small batch sizes and long set-uptimes (Öker & Adıgüzel, 2016).
Recommendationsto resolve issues/problems identified and expected financialimprovement of recommendations
The organizationcan adopt several recommendations to tackle the identified problems.For example, it may be proper to purchase materials and scheduleproduction (Öker & Adıgüzel, 2016). This will avoid theproblem of small batch sizes and save resources that would be used tomake additional orders. The organization can also move materials andresolve quality problems to reduce the set-up times (Öker &Adıgüzel, 2016). Consequently, the firm can save plenty ofresources that would otherwise be used to perform engineeringchanges.
Kaplan, R., & Anderson, S. R. (2013). Time-driven activity-basedcosting: A simpler and more powerful path to higher profits. Boston,Mass.: Harvard Business Press.
Öker, F., & Adıgüzel, H. (2016). Time‐drivenactivity‐based costing: Animplementation in a manufacturing company. Journal of CorporateAccounting & Finance, 27(3), 39-56.