Is ABC Suitable for Your Company ?

Is ABC Suitable for Your Company ?By : Vilgia Delarhoza ( 1110534016 )Winda Dwi Putri ( 1110534022 )Still Remember What is ABC ? ABC stands for Activity Based Costing

Activity-based costing(ABC) is a costing methodology that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each.

This model assigns moreindirect cost (overhead) intodirect costs compared to conventional costing.Is ABC suitable for your company ?What is the objective way to decide ?How To Make ABC be effective ?

A majority of all costs incurred by a significant unit of a business must be analyzed systematically .

Those cost is not include not only fixed and variable factory burden costs, but also some fixed and variable marketing and administrative costs.

So, Managers should be assured of the advantages before embarking on the implemation ABCActually, Implementation of ABC is requires a complex , comprehensive process that is costly and time consuming.

Benefit of ABC Factors involved in first dimensionNumber and diversity of product and services producedDiversity and differential degree of support services used for different productsThe extent to which common or joint processes are usedThe effectiveness of current cost allocation methodsThe rate of growth of period costsFactors involved in second dimensionManagements freedom to set pricesThe ratio of the period costs to total costsStrategic considerationClimate and culture of cost reduction in companyFrequency of analysis that is desirable or necessary A contingency approach to implementing ABCBased on a companys analysis of itself. Consist of weighting and combining the weights of the above factors and dimension.To start management must analyze the nature of the company in light of responses to two key question :For a given organization, is it likely that ABC will produce costs that are significanly different from those that are generated with Conventional Accounting, and does it seems likely that those costs will be better ?

If information that is considered better is generated by the new system, will the new information change the dependent decisions made by the management ? How to find the answer ? There are TEN MEDITIATING FACTORS can guide management determining the answers.

1. Product Diversity (PD)Quantity or range of distinct product or the variety of product families offered.

For example :It is unlikely that 20cm diameter ball bearings are a different product offering from 21 cm diameter of ball bearing. Differences in the complexity of various products also should be reflected in this analysis. Products that appear relatively homogenous but that vary greatly in complexity are indicative of high diversity There are numerous considerations in evaluating the extent and degree of product diversity : Accounting product classificationMarket servedStockroomsSalesAdvertising2. Suppport Diversity ( SD )Range or variation of support overhead given to product. Asumption cant be based on size. Even if the organization is only a cost center or production facility, if it has more than one basic product support requirements probably exist.

A superficial look at the organization may indicate little diversity, but a closer examination may reveal that actual activities vary greatly by product 3. Common Process ( CP )Degree of commonality of process among the different product offering. Processes encompass all identifiable activities including manufacturing, engineering,marketing, distribution, accounting, material handling, quality control, research and development.if there is a high degree of commonality of process or activities among products, period costs required by each product cannot be separated using conventional management accounting.

ABC may be more EFFECTIVE 4. Period Cost Allocation ( CA )Existing consting systems conceptual ability to allocate period cost properly. In essence, period cost allocation methodology to determine if its capable of mimicking the results of ABC. Major focus of ABC analysis is on associating period costs with products. ABC also suggest that many non manufacturing costs, such as marketing costs, also are a function of product activity and should be loaded in the products responsible for their incurrance.

5. Rate of growth of period costs (PG)Growth in period as an indicator of the dynamism required by the costing system.

One of ABCs strength is its ability to capture changes in the support requirements of products quickly through its direct measurement of activity levels.

How Does Management Use Cost Information in Decisions?Pricing Freedom (PF)Pricing freedom refers to the companys degree of power and freedom to set prices and therefore establish product profitability.

Period Expense Ratio (FE)Period expense ratio addresses the possible materiality of product cost distortions directly.

Strategic Consideration (SC)Strategic considerations refer to the constraints imposed upon managements decisions by its explicit or implicit strategies.

Cost Reduction (CR)Cost reduction involves the corporate culture as it affects the relationship between internal cost-related decisions and the indirect component of the total cost of product.Analysis Frequency (AF)Analysis frequency refers to the frequency, either routine or special, of product cost analyses and incorporates both the current and the desired frequencies.