• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Compare the uses of both variable and activity based costing as managerial decision making tools in business providing both examples and applications. Be specific on how service products must have good cost measures to access both profit accuracy and proc

Extracts from this document...


Compare the uses of both variable and activity based costing as managerial decision making tools in business providing both examples and applications. Be specific on how service products must have good cost measures to access both profit accuracy and process adjustments to remain competitive. Review of subject Both variable and activity based costing are valuable management tools in business. In this paper, we will discuss how variable and activity based costing used in an organization and explain how these two methods differ. Variable costing is method of determining unit product cost and it is used internally for planning and control purposes only. Whereas, activity based costing (ABC) is a costing method based on activities that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity. We will also be looking to find the answer how service products must have good cost measures to access both profit accuracy and process adjustments to remain competitive. Discussion Variable and activity based costing are managerial decision making tools. Variable costing identifies contribution margins of individual products, helps managers make decisions on what products to develop and what product to improve while ABC identifies profitability of individual products and from individual customers, helps managers make decisions on what products or customers' relationship to develop and what products or customers' relationship to improve. ...read more.


Companies that use variable costing for internal reporting must convert to absorption costing for external reporting. Activity Based Costing (ABC -- also called transaction cost analysis) starts by apportioning an organization's expenses to a set of cost pools, usually classified by activity rather than by organizational unit or department. Cost analysts then use statistics to determine which transactions cause these pools to vary in size. These are called activity drivers, resource drivers, or cost drivers. Examples of cost drivers in a manufacturing environment include the number of inspections, raw materials receipts, the number of components in inventory, machine setups, or change orders. In many organizations, ABC is a by-product of quality management. Under quality management, ABC is used to distinguish between activities that add value (to final products) and those that do not -- like inspection, rework, and scrap, which arise out of defects in the service delivery process. Because quality management pushes significant operating decisions down to the lowest levels of the organization, cost measures and cost estimates are needed at the lowest levels, as are measures of rework, activity cycle time, customer satisfaction, etc. Standards are also needed for cost/performance measures. Standards can be based on the best an organization has achieved over time (base lining), the best practice currently being achieved somewhere (benchmarking), or an engineering standard -- in target costing, for example, price targets are set by the market (price less planned markup equals allowable cost) ...read more.


Regardless of its reliability, however, it is all we have or can have. In the second instance, cost is measured after decisions have been made and implemented. Only the measurement method and its consequences are conveyed prior to the decision. In this second case, measured costs are used to evaluate managerial performance, with the purpose of influencing management choices. Consequently, managers must be informed as to how their performance will be measured and how performance measured will affect outcomes they care about -- promotion pay, esteem, etc. Conclusion Planned costs must take account of cost behavior if they are to provide a reliable basis for control. In addition, the link between sales and profit performance, under variable costing, ensures a performance measure that managers understand easily. With the need to identify fixed and variable cost, and their importance to the production or service, as well being needed for managerial decisions these all interlink and are useful in identifying the needs of methods of use. The purpose of the various costing classification are dependent upon what type of project is being undertaken and what the intended outcome is. However, I feel that ABC fits in to the uses of various different. This method can be a more appropriate way of classification of costs as it recognizes that in the long run most costs are not fixed, and it seeks to understand the forces that cause overhead costs to change overtime, and what activities cause costs and create demand. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our University Degree Management Studies section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related University Degree Management Studies essays

  1. Lonely Planet - management structure, growth and decision making.

    Many individuals at different locations can work on the same documents, hold meetings and integrate research findings. Electronic communications eliminates the power of communications gatekeepers to both positive and negative effects. Lonely Planet used to controlling the messages that go out to its constituents through managers, spokespeople and others.

  2. General Management - organisation, leadership and theories.

    illustration also shows what has already been achieved in democratic countries and what remains to be achieved. What I have described here is a list of needs and wants and thus policy aims, the successive achievement of which gives a sequence and a measure of noted and felt progress which should give a feeling of forward movement, growth and satisfaction.

  1. Decision Making: Decision Support Systems. In this paper, we explore the decision-making ...

    "...finding relevant variables, linking them in a causal chain and assessing the plausibility of the chain." (Einhorn and Hogarth, 1987) Doing so can lead to more accurate and sound decisions. Rationality or a rational choice model: "This concept of rationality may refer to a descriptive model of individual or organizational behaviour, but rationality is also a prescription for decision-making behaviour.

  2. Innovation For Business Success. It is possible to be innovative in both large ...

    It includes their manufacturing capability and quality control, which must be first class to compete, and also their information management capability, which must match the quality of their physical transformation and logistics systems. GPC is a hard-driving user of SAP using these information systems to drive and support their fast response capability.

  1. Organizational decision Making

    Of particular importance is the way that groups arrive at decisions. The most fundamental decisions are made by individuals. When several individuals come together in order to form a group, decisions can be made by the leader, and passed to group members in an autocratic manner, or decisions can be made by the group as a whole.

  2. How appropriate/useful do you think these analytical/modelling tools are for the strategic decision maker?

    Competitor analysis- Now days, for any company, it is critically important to know about its competitors, their strengths-weaknesses & what makes them successful. This type of analysis will help the company to counter-act their strengths and exploiting their weaknesses to achieve their business goals.

  1. Different Types and Purposes of Business Communications.

    As people go out of their work, they have casual conversation with their friends in office. Those friends can be from any department or may be occupying any hierarchical level in the organization. Although some of the conversations relate to personal matters, business is also discussed.

  2. Identify various decisions that may be taken by managers at different managerial levels at ...

    * MIDDLE-LEVEL MANAGERS Middle-level managers, or middle managers, are those in the levels below top managers. Middle level management is the link between top level and low level management and executory by nature. In Vietnam Airline, middle-level managers are responsible for carrying out the goals set by top management.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work