Question

If you were tasked with reviewing your company's activity based costing system. The system has been in place for several years and management believes the company is losing market share to the competitors. What steps would you take and what data would you review to make any recommendations to the company management about the current system or enhancements/changes needed.

Answer 1

Activity based costing

ABC costing is a costing method which identifies activities in an business and assign cost for each activity to all product and services.compared to conventional costing method it assign more indirect cost into direct costs.activity costing is mainly used in manufacturing industry.because it enhances reliability of cost data.also there are some steps we need to follow when doing activity based costing.

company currently used ABC costing ,we need further information to actually understand whats's going on the company.ABC costing is mainly used in manufacturing organisation,sometime the company might need to consider other costing method or review the steps used for the costing.there are many alternative costing method like,life cycle costing,throughput costing etc

ABC will be limited benefit if the overhead costs are volume related or overhead is a small proportion of the overall cost.then it is impossible to allocate overhead to specific activities.also the management might need expertise in ABC costing,because it is complex.

the management or the party who are in charge of ABC costing must ensure that they have taken the correct cost driver.selection of cost driver is critical and can only done by expert professionals.

if the company is planning to consider shifting to a new costing method,there are many factor to consider,when shifting to a new costing method,they might incur lot of cost.they also need time to implement this in the company.

the company must review the steps of ABC costing ,main steps are below.

Step 1: activity identification

step 2 : activity analysis

step 3: assignment of costs

step 4 :calculate activity rates

step 5 : assign cost to cost driver

step 6 :prepare report

in conclusion, the company must do a proper review on the steps taken,also must ensure weather ABC costing with there business activity.if they are planning to consider a different costing method they must do proper analysis.