Discussion-Activity-Based Costing System.
Activity-based costing is one of the most accurate methods that can be used to allocate overhead. However, it is not often used in many smaller organizations due to the substantial cost involved with its implementation.
Using the module readings and the Argosy University online library resources, research the activity-based costing method. Use your research and/or your experiences as a working professional to complete this assignment.
Respond to the following:
• If you have utilized an activity-based costing system in your former or current employment, describe how this system had been used. In your response, be sure to include your experience and position on the effectiveness of the activity-based costing system. Support your ideas by drawing on your readings and scholarly articles.
• If you have not encountered this type of system in your work experience, assume a company needs to switch to an ABC system. Describe the common cost drivers that could be used.
• How would the organization identify the cost drivers?
• How would the organization use them in the implementation of this system? You may use your former or current company for the analysis.
Write your initial response in 3-4 paragraphs. Apply APA standards to citation of sources.
• Read all posts from your peers.
• Explain how their experiences differ from yours.
• Provide substantive comments by contributing new, relevant information or quotes from course readings, Web sites, or other sources; building on the remarks or questions of others; or sharing practical examples of key concepts from your experiences, professional or personal.
Text Book: Garrison, R. (2012). Managerial Accounting (14th ed). McGraw-Hill Learning Solutions.
Activity-based costing (ABC) is one of the "hottest" areas in managerial costing. As you have learned to date, there are many different ways that a company can allocate overhead costs to various projects. ABC is regarded as one of the most effective measures to allocate this overhead. Though it is considered highly effective, many businesses are unable to utilize it due to the high setup cost, which has declined over the years due to improved technology. As a professional in a management role, it is highly probable that you will encounter the use, or proposed use of ABC in a management setting.
Within the ABC system, there are seven steps:
1. Identify the cost objects. Cost objects are the products being produced.
2. The direct costs need to be identified. The direct costs include direct materials and direct labor associated with creating or manufacturing the product.
3. It is necessary to identify the activity drivers-those significant activities that create value of the product and set the allocation base. The allocation base is similar to that used under job costing such as direct labor hours or machine hours. For example, if inspections or set-up time are considered activity drivers or significant activities within the production process then the allocation base maybe direct labor hours involved in step up or the set-up hours.
4. Identify all the indirect costs. The total indirect cost or manufacturing overhead is broken down into cost pools based on the significant activities identified. For example, previously set-up was used as a significant activity. All the cost related to the set-up activity would be included in its related cost pool.
5. Calculate an overhead rate for each base or activity identified. This is similar to what was done under job costing system, where you have calculated a rate that would be applied in our cost allocation. The key aspect to note is that there will be more than one rate. There will be several rates based on the number of activities identified in the process.
6. Calculate the indirect costs for the allocation. This is similar to what was done in our job costing system, but instead of having one rate and one allocation, there may be several based on the number of activities identified.
7. Compute the total costs. The total costs are the combination of direct material and direct labor as well as indirect costs or manufacturing overhead.