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Essay on Activity Based Costing for Financial Based Institutions
Activity Based Costing (ABC) is a method of measuring the cost and performance of an organization based on activities, which the organization uses in producing its output. ABC is not a replacement for traditional general ledger accounting. Rather, it's a way to translate general ledger data into a format that helps managers make decisions.
In the late 1980’s, activity-based costing (ABC) gained the attention of academic researchers, consultants, and managers as a means of overcoming the disadvantages of traditional cost allocation methods. Cost accounting had traditionally allocated overhead to products or services using only one volume-sensitive driver, typically direct labor. For organizations with high overhead and a mix of products or services, using a single cost driver may distort cost estimates (Cooper, Kaplan, 1998). Traditional methods of allocating overhead were therefore believed to be deficient in terms of improving global competitiveness.
During the late 1980’s and early 1990’s, the ABC approach was implemented in a number of large financial based companies. Managers armed with the ABC system were able to reduce costs, identify opportunities for improvement, and determine a more profitable product mix (Cooper, Kaplan, 1991). Because of its perceived superiority, ABC was expected to gradually replace traditional methods. The results of earlier studies suggest, however, that the rate of diffusion of ABC has been slower than expected.
What is Activity Based Management?
Activity Based Management (ABM) is common sense, systematic method of planning, controlling and improving labor and overhead cost. ABM is based on the principle "activities consume costs". While traditional cost systems focus on the "worker", ABM systems focus on the "work". The basic building block for ABM is Activity Accounting.
What is Activity Based Costing?
Activity Based Costing (ABC) is a systematic, cause & effect method of assigning the cost of activities to products, services, customers or any cost object. ABC is based on the principle that "products consume activities"...........
