Friday, March 1, 2019
Advantages of Activity Based Costing
In modern traffic surround, the wont of traditionalistic embody scheme is no longer relevance to the follow to achieve free-enterprise(a) advantage. Nowadays, Activity Based Costing is considered as superstar of the effective cocksuckers to enhance the ability of the governance to meet world-wide competition. This had resulted in the change from traditional embodying system to an increasingly popular speak toing system much(prenominal) Activity-Based Costing (first principle). rudiment system has emerged as an resource to traditional be system to meet the need for finished follow development about the results, servicings, client and processes. rudiment fulfils the arithmetic to provide accurate cost information while Activity Based Management (antiballistic missile) is centre on using this information obtained from first rudiment to manage shamivities in dedicate of battle to improving business (Gunasekaran et al. , 2000). Generally alphabet systems enabl e indirect and live expenses onto each activeness. Following by identify the cost drivers to measure the activity used by cost objects and allocate them to cost driver.In order word, alphabet sponsors the manager to understand about the cost and expense in each resultion by giving managers a clearer picture of the economic science of their operations to managerial finish making at a strategical level (Kaplan and Copper, 1998). aside from that, in twenty-first century market which is global consumer markets and rapidly changing product technologies start out forced global manufacturers to crystallise dramatic changes in their products, markets as well as production strategies.In order to stay in the global market, administrations are advice to adopt ABC non merely produces products at faster rates, but they produce with greater consistency and conformity to pure tone ad hocations. Also, ABC system allows the manufacturers to surmount the measure between client order and product delivery which basin gives the manufacturer a competitive advantage in improving customer service (Gunasekaran et al. , 1999).Therefore, it is necessary for organisation to adopt ABC system which drive out assistant managers in identifying the value-added activities which they could further improve to meet customers demands and enhancing the product lineament and process simplification and efficiency (Marx, 2009). For example, MelCo is the club that implements ABC and gets the benefits from it. MelCo is the only manufacturer of engineering components in Melbourne. Its previous be system was a conventional costing system where overheads were allocated to products based on labour hour utilised (Sohal and Chung, 1998).However, vigilance found that implement ABC system in the organisation is seem to be useful because it can assist in high spirits level of flexibility and responsiveness that demanded by the marketplace. Besides, ABC system can generate true costing a nd pricing which automatically give performance measures and product profitability as well as provide a variety of information for forethought in strategic decisiveness making. steady though it incur high cost, MelCo think that it is worthiness because it provides a tool for way for commercial decision making although it just implement for 12 months (Sohal and Chung, 1998).Due to the changes of business surroundings, the company requires to manufacture very wide product range for a large customer base with high quality and innovative products in order to fulfil the demand of the consumer. By implementing ABC in organisation, ABM guides efforts to adapt business strategies to meet competitive pressures as well as to improve business operations. ABC information enables ABM to yield continuous improvement process. By continuous improvement, organisation can yield the maximum profitability as well as change the customers satisfaction (Gunasekaran et al. 2000). Nowadays, customers w ant products and services that fit their specific needs they want quality service at affordable damage to be right now. However, since traditional costing system is volume-based, inaccurate information lead be generated which lead to company make wrong decision (Gunasekaran et al. , 1999). by from that, stable product and mass production are no longer valid for today manufacturing system. Thus, manufacturing companies perk up reduced the implication of traditional cost bill system by implementing ABC systems.In railway line to standard costing, ABC can identify value-added and non-value-added activities. To clarify this, all activities should be compared with similar activities in a nonher company or within the organisation in order to perform the best. Hence, benchmarking should be encourages to be carried out for some(prenominal) value-added and non-value added activities because it is a best practice which is aboutly used in real-life slip (Gunasekaran et al. , 1999). Fo r example, 100% on condemnation delivery of customer orders is an essential activity.Apart from that, non-value-added activities such as inspection and material handling can be reduced by using different quality assurance methods and techniques such as total quality management and just in time. With ABC, the company has a better access to decision which related to TQM and JIT (Gunasekaran et al. , 1999). To achieve cost reduction in a strategic way, activity-based costing presents to be to a greater extent accurate in determining costly activities in order to help companies to better manage those activities.Unlike the information available under traditional management story, ABC systems are capture the significant information among customer orders and provide strategic decision making with the indication of the changes in the customers specifications (Lere, 2000). By implementing ABC system, it overly can reduce non-value activities as well as cost of their products to compete in today competitive market. Non-value added activities can be eliminated with the implementation of strategies such as total quality management, just in time and business process re-engineering.Managers should pay more than attention to those activities which will incur high cost but does not add any value to the product. Besides, managers prepared with the ABC systems were able to reduce overall costs, identify the opportunities for continuous improvement of the products. Nowadays, technology plays a dominating role of integrating various functional areas. Although the automation in advanced(a) manufacturing environment has reduced the labour component, at the same time overheads have increased (Gunasekaran et al. , 1999).Therefore, in manufacturing environment, it is necessary for organisation to minimize non-value adding activities to reduce the cost of their products to compete in the market. By implementing ABC system in organisation, it will help to reduce direct labour comp onent, increase in overheads as well as productivity of knowledge workers. Apart from that, ABC also helps organisation in better communications and team working environment as well as reduce time required to perform an activities due to knowledge workers and re-engineering the suggestions by employees to reduce the non-value activities (Gunasekaran et al. 1999). In contrast, the traditional costing systems do not provide non-financial information such as blur rates, level of quality about the organisation. However, implementation of activity based costing is not an easy task as there are several(prenominal) difficulties in implementing ABC system. One of the first fundamentals for the success of an ABC implementation is top management support for the project (Zhang and Che, 2010). The failure of ABC projects can generally be attributed to lack of visible and active management.If the organisations senior managers do not show the commitment and act passive in the program, it will ne gatively reduce the motivation of the employees. Apart from that, the productivity of the employees will also affect as well. Therefore, top management should be give full support with clear understanding of goals and objectives of the social unit organisation to the employees. Besides, they should meet regularly in order to advise the management on the strategic and technology business problems (Gunasekaran et al. , 1999).Commitment of employees is one of the strategic factors in implementing ABC system. For the successful implementation in ABC, the employees must have a clear understanding of its capabilities, goals and objectives (Zhang and Che, 2010). As a result, education and fosterage are necessary for the employees to make sure that they understand the objective of ABC system. When the employees are well trained and educated, they can easily reduce the time and effort required to perform an activity, on-time delivery as well as reduce the cycle time of the product.Also, e mployees should be provide with internal and impertinent company training facilities to ensure them gain latest knowledge and cut back in order to maintain companys standard in today global market (Zhang and Che, 2010). For example, MelCo is a company that implementing ABC system and it found that the problems during implementation was lack of available skills in-house which means that they do not have considerable amount of education and training.Therefore, MelCo are recommended that training of employees should be taking into consideration (Sohal and Chung, 1998). As a conclusion, the changes of global business environment had changes the way of the company doing the business and shift traditional management accounting to strategic management accounting for cost management in organisations. However, it does not means that traditional management accounting is usefulness and not applicable in today business environment.Relevance of traditional cost accounting is very subjective in each view of the organisation. It may be suitable for some companies treated standard costing and variance outline as a tool that enhances planning and control and improves performance military rank rather than abolished it. To compete in today business environment, strategic management accounting is the most suitable accounting system for the organisation as ABC method can provides more accurate and better cost information which can helps manager to understand and make strategic decision making.Furthermore, ABC system can eliminate the non-value added activities which added value to the product cost, by doing so, organisation can reduce those unnecessary costs. Thus, ABC system is most appropriate management accounting costing in today business environment. However, there are several problems and difficulties in implementing ABC system, company should go into consideration when implementing ABC in order to maximize the fully benefits for ABC systems.