Question

Activity-based costing, or ABC, is a costing method that managers can use for internal cost reporting and decision making. While ABC isn't allowed for external financial reporting, companies may find it useful to enact an ABC system to more effectively analyze cost data. ABC systems excel at being able to assign costs to products that are manufactured and supported by many different types of activities.

Question is, would this be very expensive? And, is there a lot of training involved?

Answer 1

Activity-based costing (ABC) incorporates techniques to trace indirect costs (commonly called “overhead”) to cost objects (e.g., products, services, and customers) by:

• Identifying how resources are consumed by activities, which, ultimately, support the production of the desired cost objects
• Distributing the costs of these resources in the same ratio that they consumed to determine the cost of activities and, ultimately, the costs attributable to the cost objects.

There are some implementation challenges

• Implementing ABC system requires a big budget initially

•After implementation the maintenance of the system is costly .Date concerning numerous activity must be collected and entered into the system on regular basis

•ABC system produces numbers such as product margin that are different from the profits produced by the traditional costing system .Management may br double minded as they are used to work with traditional costing system, as a requirement for external reporting

•ABC system generated data can be misinterpreted and must be use with care when used in making decisions.costs assigned to products,customers and other cost objects are only potentially relevant .

• Reports generated by ABC system do not conform to Generally accepted accounting principles (GAAP) .

•Huge training expenses are involved as the employees are unaware of the new implementation