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Essay on Activity Based Costing for Steinway & Sons
Activity-Based Costing (ABC) is a method of allocating costs to products and services. It is generally used as a tool for planning and control (Gary, 1993).
ABC will allow Steinway & Sons to attribute costs to activities and products more accurately than traditional cost accounting methods. The activities responsible for the costs can be identified and passed on to users only when the product or service uses the activity. Some of the advantages of for Steinway & Sons are: an improved means of identifying high overhead costs per unit and finding ways to reduce the costs.
ABC will allow Steinway & Sons a truer, more complete picture of costs to emerge. The cause-and-effect relationship of costs and jobs will become clearer. For example, when it becomes obvious that a certain kind of job causes activities that the company ultimately must pay for, the company can develop some kind of formula for directing an appropriate portion of that activity's cost to that kind of job. The formula usually breaks down the accumulated costs of that activity (what that activity cost for a whole year, for the whole plant, for all employees and so on) according to some statistical basis to be applied as a rate—per incident, by the square foot of plant space, per worker, and so on. ABC will help Steinway & Sons make better utilization of its equipment. It will help Steinway & Sons to protect the organization against mistakes based on what seems like common sense.
Activity Based Costing will add the most value to Steinway & Sons if it is used as the informational basis of managing and improving the business. Activity analysis can lead to an Activity Based Management business model from which management can make decisions to improve the effectiveness of the organization. These improvements can take the form of incremental process improvement using Total Quality, Just-in-Time or Reengineering....
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