Running head: ACTIVITY BASED COSTING 1
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Activity-based cost management
Running head: ACTIVITY BASED COSTING 1
ACTIVITY BASED COSTING 5
Activity based costing
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Activity based costing
Activity-based costing refers to the situation by which companies tend to evaluate the costs of producing its products by understanding all the activities that are associated with the manufacturing process (Cokins, 2001). In other words, organizations tend to work to break down the entire the manufacturing process into various activities. Once the entire manufacturing process has been broken down into various activities, each activity is assigned a certain amount that is incurred for the entire manufacturing process to be complete. Therefore, activity-based costing helps the firm to identify the cost of each activity enabling it to implement techniques that can be used to reduce the cost of the entire manufacturing process.
If you implemented activity-based costing for your division, what additional costs would you consider as manufacturing costs?
Manufacturing of polythene bags requires that the company has to conduct different activities at the same to ensure that the products are of the right quality. In other words, different processes are associated with the production of the polythene bags. It is for this reason that the company should initiate the activity-based costing to help it evaluate the costs that are necessary for the production of the polythene bags. However, first and foremost, it is inevitable for the division to begin by analyzing all the activities that make up the entire manufacturing process. In other words, the first thing that should be done by the division is to take the time to assess all the activities that should be performed and that are related to the production of the polythene bags. Once this has been done, it becomes easy for the other employees to appreciate the existence of various roles and responsibilities that are directly related to the production of the polythene bags and making sure they are in that condition that will be accepted by the market.
However, other additional costs cannot be directly related to the production of the polythene bags but must be taken into consideration when summing up all that has been incurred by the company to attain its success. For instance, there is the issue to do with research that is conducted to allow the firm to understand the best ways that can be used to produce the bags. In other words, for the production of the polythene bags to be conducted in the best manner possible, there is the need for the division to choose a certain team that will be required to conduct market research and ensure the implementation of the best technological measures that can be initiated in producing high-quality commodities. Also, there are issues such as rent, telephone bills, water bills, transportation costs, and maintenance of the equipment. In other words, all these costs are taken into consideration when coming up with the specific costs that are associated with the production activities of the bags.
How would you allocate those costs to your division?
The allocation of the costs to the division should be carried out most strategically as a way of ensuring that the costs are well catered for by each department (Lanen, Anderson, & Maher, 2008). Therefore, the allocation of the costs should be conducted in a manner that allows the firm to ensure that all the activities earn the specific amounts that are genuine. For instance, the division should sum up all the costs that have been incurred and calculate the rate at which it consumes different resources. In other words, the allocation of the resources should be conducted by taking into consideration the specific amount of resources that are consumed by a certain activity and an individual. It results in the assurance of fairness and equity when seeking to realize how much should be ploughed in by the division. With this in mind, the firm will always ensure that no division caters for more costs than what it had consumed. Therefore, activity-based costing stands out to be more reliable than the other methods that are used to understand how to allocate the costs.
Would activity-based costing give you a more or less realistic picture of your division’s costs incurred to produce revenue?
Yes, the activity-based costing method is effective when it comes to providing a clear picture that relates to how most of the costs had been incurred to result in the realization of profits. In other words, activity-based costing provides an opportunity for the division to understand what has been invested in the individual activities to realize the specific revenue. Therefore, the method can be relied on since the costs incurred can be used to understand which activities resulted in high profits and which can are not effective and can be done away with considering that they are not profitable to the company.
If you choose not fully to implement activity-based costing, what would you have learned about your department’s costs that would help you operate more profitably?
First and foremost, I would have learnt that each activity in the corporation has an impact on the overall success of the firm. In other words, it would be clear that when a company decides to measure its success, it should not forget that each activity had a certain level of effort towards the achievement of the various targets (Ostwald, & McLaren, 2004). Moreover, I would have understood that it is important for a company to take into consideration all the activities when comparing the success of the firm and what has been invested in the past. Therefore, it is for this reason that it is evident that activity-based costing is of great value when dealing with organizational success.
References
Cokins, G. (2001). Activity-based cost management: an executive’s guide. New York: Wiley.
Lanen, W.N., Anderson, S. & Maher, M.W. (2008). Fundamentals of Cost Accounting.
McGraw Hill.
Ostwald, P.F., & McLaren, T.S. (2004). Cost Analysis and Estimating for Engineering and
Management. Prentice Hall.
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