Designing and Implementing Activity Based
Costing (ABC) System:
Experts agree on several essential characteristics
of any successful implementation of activity
based costing system.
First,
the initiative to implement activity based costing
must be strongly supported by top management.
Second, the design and implementation of activity
based costing system should be the responsibility of
a cross functional team rather than of the
accounting department. The team should include
representatives from each area that will use the
data provided by the activity based costing system.
Ordinarily, this would include representatives from
marketing, production, engineering and top
management as well as technically trained accounting
staff. An out side consultant who specializes in
activity based costing system serve as an advisor to
the team.
The
reason for insisting on strong top management
support and a multifunction team approach is rooted
in the fact that implementing activity based costing
system is difficult in organizations unless those
changes have the full support of those who are
affected. Activity based costing changes " the
rules of the game" since it changes some of the
key measures that managers use for their decision
making and for evaluating individuals' performance.
Unless the managers who are directly affected by the
changes in the rules have a say, resistance will be
inevitable. In addition, designing a good activity
based costing system requires intimate knowledge of
many parts of the organization's overall operations.
This knowledge can only come from the people who are
familiar with those operations.
Implementation of activity based costing system must
be initiated by top management due to two reasons.
First, without leadership from top management, some
managers may not see any reason to change. Second,
if top managers do not support the ABC system and
continue to play the game by the old rules, their
subordinates will quickly get the message that ABC
is not important and they will abandon the ABC
initiative. Time after time, when accountants have
attempted to implement an ABC system on their own
with top-management support and active cooperation
from other managers, the results have been ignored.
For
designing and implementing activity based costing
system, management should carefully study the
existing cost accounting system and review the
articles in professionals and trade journals. In
most of the organizations, the new activity based
costing system supplement, rather than replace, the
existing cost accounting system, which continues to
be used for external financial reports. The
following chart explains the general structure of
activity based (ABC) costing model.
The Activity Based Costing Model
Cost
Objects
(e.g., products and customers) |
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Activities |
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|
Consumption
of Resources |
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|
Cost |
Usually, company's
traditional cost accounting system adequately
measures the direct material and direct labor costs
of products since these costs are directly traced to
products. In most of the organizations activity
based costing study is usually concerned solely with
the other costs of the company - manufacturing
overhead and selling, general, and administrative
costs.
The activity based
costing implementation team should carefully plan
about implementing activity based costing.
Implementation process may be broken down into the
following six basic steps. Relevant
Articles:
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