Assignment:
To remain competitive in today's challenging business environment, companies have had to rethink their organizational processes and basic operating methods (Crosson & Needles, 2014). Epstein & Rejc Buhovac (2014) highlighted that number of companies have begun the transition to improved social and environmental cost accounting in two ways: by clarifying their understanding of internal social and environmental costs through ABC (activity-based costing), and by placing a value on significant external costs, through LCC (life-cycle costing) or other approaches. Other companies have chosen to use FCA (full cost accounting) to include a broader set of external costs along with future costs into management decision-making.
Different Costing Systems
Activity-based costing (ABC) is the tool used in an ABM environment to assign activity costs to cost objects. The Activity Based Costing (ABC) system is defined as an accounting (Costing) and administration system. ABC helps managers make better pricing decisions, inventory valuations, and profitability decisions. It is a method of assigning costs that calculates a more accurate product cost than traditional methods (Crosson & Needles, 2014).
Advantages & disadvantages of Activity Based Costing (ABC) system
Stefea & Abbas (2014) stated the advantages of ABC as following:
Supporting mechanisms for controlling and managing the costs through specifying accurately the product, service and activities, which drive costs and help for the appropriate allocation of additional costs.
ABC system assist to achieve the accurate following up of indirect costs, which currently forms a large portion of the total costs even in some economical services firms.
Determining the important activities in the firms because it is a valuable managerial tool and it is useful in the service organizations, which the Traditional Cost (TC) systems are not appropriate for the nature of services sector system.
Maximizing the profitability through providing accurate and timely information about costs in light of severe competition in the aim of pricing the products or services.
Making better managerial decisions through accurate determination of the products costs.
Contribution in provision of improved financial and non-financial information to the firms.
While ABC does increase the accuracy of cost information and gives managers greater control over the costs they manage, it does have its limitations, including the following:
High measurement costs necessary to collect accurate data from many activities instead of just one overhead account may make ABC too costly.
Some costs are difficult to assign to a specific activity or cost object since they benefit the business in general (e.g., the president's salary) and should not be arbitrarily allocated.
ABC allocations may add undue complexity and complications to controlling costs.
Although ABC is considered highly accurate and sophisticated, its adoption is limited because of its complexity and cost to implement, maintain, and update (Lelkes & Deis, 2013).
Full Cost Accounting: The most widespread method or tool for incorporating a broader set of external along with future costs in decision-making is FCA (Mei, 2011). FCA allocates all direct and indirect costs to a product or product line for inventory valuation, profitability analysis and pricing decisions. An important element of FCA is the consideration of future social, environmental, and economic costs and allocation of these costs to products. Then, current and future environmental costs should be integrated into the product costing system (2011).
Advantages and Disadvantages of Full Cost Accounting (FCA)
Advantages
Identify the costs of MSW management
See through the peaks and valleys in SWM cash expenditures
Explain SWM costs to citizens more clearly
Adopt a businesslike approach to SWM
Evaluate the appropriate mix of SWM services
Disadvantages
Require expertise and knowledge
Social and environmental costs are not measureable
Discomfort with transparency
Require support from senior management
Time consuming and costly
Life Cycle Costing: LCC attempts to identify all the costs - internal and external - associated with a product, process, or activity throughout all stages of its life. Life-cycle cost has been defined as the amortized annual cost of a product, including capital costs, and disposal costs discounted over the lifetime of a product. With regard to social and environmental costs, LCC consists of monetizing social and environmental impacts throughout a product's life-cycle. It requires the measurement of present and future costs and benefits of a company's products, services and activities and can be an important part of the implementation of a sustainability strategy. In general, life cycle cost of products is estimated using life cycle cost models. A life cycle cost model identifies the various cost components associated with the life cycle of a product and represents them in the form of an equation. There are different approaches to developing cost models for LCC analysis (Waghmode & Sahasrabudhe, 2012). Thus, the LCC modelling approaches can be classified into specific life cycle cost models and non-specific life cycle cost models. The specific life cycle cost models are developed for a particular product or system. On the other hand, the non-specific models are not tied to any specific product or system.
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