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Business Administration: Management Accounting

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UNIVERSITY OF WALES, NEWPORT - NEWPORT BUSINESS SCHOOL - Report concerning: a) the comparison of activity-based costing to the client's basis of overhead absorption; b) the analysis of potential benefits of activity - based costing; c) the required information needed to implement activity - based costing DANIEL BRADTKE 17th November 2004 Course Title: BSc (Hons) Business Administration Module Title: Management Accounting Module number: (G)104599 TABLE OF CONTENTS TITLE PAGE 1 ABSTRACT 3 INTRODUCTION 4 SECTION ONE: 1. Comparison of ABC and the client's basis of overhead absorption 6 1.1 Characteristics and function of the client's current basis of overhead absorption 6 1.2 Characteristics and function of ABC 8 SECTION TWO: 2. Analysis of the potential benefits of ABC 11 2.1 Determination of accurate product cost 11 2.2 Profitable Product-Mix 11 2.3 Process efficiency and improvement of the business plan 12 SECTION THREE: 3. Implementation of ABC and the required information 13 Conclusion 15 References 16 Bibliography Abstract The initial aim of this report is to layout the main differences of the client's current basis of overhead absorption, compared to activity - based costing (ABC). By showing the divergence of both systems, it appears that information generated from traditional overhead absorption does not properly equip client's management with suitable information for decision making. An additional aim of this paper focuses on the potential benefits of activity - based costing. ...read more.


Scarlett (2002) adds that this method does not decode information from the ledger into a format that serves managers. Subsequently, there are no answers to the question 'what does it say about current or future processes and practices?' (Andersen, 1999). Since allocation systems do not reproduce the true cost and flow across the operations and processes of a business, this cost accounting technique for capturing cost is defective. As a result, operational management tends to ignore cost accounting information. 1.2 Characteristics and function of ABC Activity-based costing is a decision making tool that allows, in comparison to the traditional overhead absorption, organisations to clarify the actual cost linked with each product and service produced. This is without regard to the organizational structure (Cooper and Kaplan, 1988). Andersen (1999) stresses the fact that ABC enables organisations to expand business performance through increased competence and reduction of costs. ABC identifies the key activities performed in all stages of delivering the product or service to the customer. It is these activities that consume the resource and these same activities that create the product. Recognising this relationship is the cornerstone of ABC. It allocates cost (or resources) to activities based on consumption of resources namely; resource cost assignment (Andersen, 1999). ABC improves upon the traditional approach by using a two-stage allocation system and multiple cost drivers (Coenenberg, 1992). ...read more.


This can give further information as to whether they are directly attributable to specific activity centres, or not (Drury, 1997). Step 3: Determine the cost driver for each major activity Drury (1997) suggests that in order to find a suitable cost driver, all information has to be offered to guarantee that the possible cost driver provides a good explanation of costs in each activity cost pool. In addition, the author points out that when generating this information it should be ensured that cost drivers stand for a homogeneous measure of the output of every activity. In this step the straightforwardness of generating information on cost driver consumption by products is vital for further actions (Drury, 1997). 4. Conclusion It seems that activity-based costing offers many strategic, operational and financial benefits to the client's organisation. The comparison of ABC and the client's current basis of overhead absorption reveal that ABC has the capability to produce more meaningful results with a higher level of accuracy. It contributes effectively to the client's decision-making process due to its method to measure product costs based on the activities performed to produce it. As a result, the client's organisation will be equipped with answers to the market needs. This will give rise to improvement of efficiency and reduction of costs without sacrificing the value to the customer. Lastly, the successful implementation of ABC into the client's company depends on the supply of accurate and proper information such as an activity analysis of the client's complete business. . 5. ...read more.

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