• 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...

Introduction

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.

Middle

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.

Conclusion

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

    and powerful "bring the voice of the customer" into the innovation process. Lonely Planet also uses outside experts to complement its staff idea contributions and lead users, which is their way of implementing open innovation. This process has worked well enough so as to encourage Lonely Planet to drive it

  2. General Management - organisation, leadership and theories.

    confront and struggle with communal institutions so as to take them over and make them serve themselves instead of the people, instead of serving the policy-making body. This means that the two sides confront each other not just at the place of work but in all communal institutions.

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

    [Demand Media] Disadvantages of Centralization and Decentralization: Centralized organizations can undergo from the negative effects of several layers of bureaucracy. These businesses often have several management layers stretching from the owner down to frontline operations. Business owners responsible for making every decision in the company may require more time to complete these tasks, which can result in slow business operations.

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

    A heuristic is a rule of thumb or a decision-making guide. Some heuristics are normative guides and evidence indicates people use heuristics to help make decisions." (Power, 2004) Use of heuristics in every day decision making has been explained in other research as well as mental shortcuts we take to cope with the complexity found in most decisions.

  1. "Provide good service quality and you will have a profitable customer for life!

    If the consumer believes that they got value out of the encounter, the relationship moves on to how satisfied they are. Defections analysis shows that "continuous improvement in service quality is not a cost but an investment in a customer who generates more profit than the margin on a one-time sale" (Reicheld and Sasser 1990 p.107).

  2. This report will discuss most characteristics and applications of Quality Management in Business;

    The first step is when managers revise business processes against customers' requirements and develop improvements. The implementation of the plan and performance evaluation are illustrated as 'do'. The third step is to check the measurements and report results. The final process is to decide the changes that need to take place in order to improve the final product.

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

    Prime Minister on the March 2009, the company has proposed the goal to be the second in South East Asia only after Singapore Airlines. * To posses 150 aircrafts by the end of 2016 * Buying or renting airplane to supply for the operation of the company; * Setting up new flight * Issuing guidelines to medium level managers.

  2. Lecture notes - Strategy Making

    Stage 3 Between the mid-1970s and the mid-1980s change became discontinuous. This was the era of the oil price shocks and the later debt crisis in the developing world. Inflation accelerated and growth slowed. The rate of growth temporarily decelerated as the easy gains of the 1950s and 60s were exhausted.

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