Skip to main content

10 Myths on Activity Based Costing

Dear Management Accountants,

Activity Based Costing has not became popular in India to what ever extent it deserve. There are so many Myths as far as this concept is concerned. This concept is developed to ascertain the accurate process cost data on activities and products and can be used for accurate product cost data, cost & OH control , identification and elimination of non- value added activities etc.,.

But in practice, in India, Its adoption is very limited and heared several comments Against its use and the most common are listed below.

  • ABC systems are too difficult to implements and use:
  • ABC systems are too costly; and
  • ABC systems are too complex to understand
  • Improving our existing system will do the job:
  • All that we need are more cost centers;
  • Machine-hour systems save the time; and
  • A cost system should be kept simple.
  • We do not need more accurate product costs:
  • We know what our products cost; and
  • The market sets prices, so we do not need product costs.
  • Cost systems play a limited role:
  • We cannot do anything about fixed costs;
  • Only manufacturing costs are product costs; and
  • Product costs are not useful for managing overhead activities.

Now I request the members to examine , discuss and share their views on each and every comment on ABC given above as to whether they are correct or are only myths. Let us have very clear views on this topic since this is a very important tool for Management Accountants.

Having clear views on this topic will help us in Answering & Convincing the World about its utility in case if we intend to Practice in this field.

(Let all of us take this as a Group discussion or a project etc., and start discussing)



Do you like to be updated in Accountancy ?

Subscribe to Management Accountant by Email
Or
Subscribe in a reader

SAP Store, UK

Visit MA Stores ? You will find something you are looking for ....

Management Accountant Store, US - Powered by Amazon
Management Accountant Store, UK Stores - Powered by Amazon, UK
Digital Store, US

You may also like to read

  1. Activity Based Management - How to collect information 10-June-08
  2. Transfer Pricing 29-Dec-06
  3. Throughput Accounting 17-Dec-06
  4. SSRK's Knowledge Repository 03-Dec-06
  5. Stakeholder Analysis 19-May-08
  6. Resistance to Change 26-Apr-08
  7. Strategy Development 05-Apr-08
  8. Strategic Drift 12-Apr-08
  9. How to Share Blog posts with friends 25-May-08
  10. Management Accountant Blog Home

Subscribe to RSS Feeds and be up-to-date

  1. Management Accountant
  2. Accountancy News
  3. My Favorite Blogs that I track
  4. SAP Jobs & Opportunities
Labels:

Comments

santoshputhran said…
ABC is primarily allocation of overheads to the products. The efforts to collect data for cost driver and activities requires a good software and IT system. Moreover management initiatives to properly price the products.

In India, cost accounting is used in large/medium sized companies. Most of them report on contribution/margin to analyse profitability of products.

So the companies that have proper cost accounting and management reporting system will be in a position to implement ABC. Moreover they will do a cost benefit analysis of ABC system - Whether this approach helps them in decision making.
27 November 2006 at 16:55:00 GMT
Anonymous said…
Hi

Do you guys know which organizations in India have implemeted ABC and what kind of tool they have used?
29 November 2006 at 09:26:00 GMT
Krish said…
As I see, ABC Systems are not for day to day costing requirements. ABC/M should be used at a strategic tool to identify those activites which are driving the product cost and do performance improvements around those activites.

Unless ABC does not include the M (Managment) which is purely use of ABC data for process improvements, analysis and decision making, organization will not be able to realize the benefits.

Also, to implement an ABC system equally important to have good process enabling systems which measure driver data and feed into the system.

Many tools exist for performing ABC but the key is to ensure that these tools are not used as a regular costing devise. Typically an ABC tool need to be run on a quartely basis.

ERP systems like SAP have ABC build into CO (Controlling) module. But, it uses different concept than the typical ABC/M methodology.
2 October 2008 at 20:56:00 BST
Post a comment

Popular posts from this blog

Learning Curve Theory

Learning Curve Theory is concerned with the idea that when a new job, process or activity commences for the first time it is likely that the workforce involved will not achieve maximum efficiency immediately. Repetition of the task is likely to make the people more confident and knowledgeable and will eventually result in a more efficient and rapid operation. Eventually the learning process will stop after continually repeating the job. As a consequence the time to complete a task will initially decline and then stabilise once efficient working is achieved. The cumulative average time per unit is assumed to decrease by a constant percentage every time that output doubles. Cumulative average time refers to the average time per unit for all units produced so far, from and including the first one made.

Major areas within management accounting where learning curve theory is likely to have consequences and suggest potential limitations of this theory.


Areas of consequence:
A Standard Costing …
1 comment
Read more

Resistence to Change - Approaches of Kotter and Schlesinger

The Six (6) Change Approaches of Kotter and Schlesinger is a model to prevent, decrease or minimize resistance to change in organizations.
According to Kotter and Schlesinger (1979), there are four reasons that certain people are resisting change: Parochial self-interest (some people are concerned with the implication of the change for themselves ad how it may effect their own interests, rather than considering the effects for the success of the business)Misunderstanding(communication problems; inadequate information)Low tolerance to change (certain people are very keen on security and stability in their work)Different assessments of the situation (some employees may disagree on the reasons for the change and on the advantages and disadvantages of the change process) Kotter and Schlesinger set out the following six (6) change approaches to deal with this resistance to change: Education and Communication - Where there is a lack…
1 comment
Read more

Throughput Accounting

Throughput accounting (TA) is an alternative to cost accounting proposed by Eliyahu M. Goldratt. It is not based on Standard Costing or Activity Based Costing (ABC). Throughput Accounting is not costing and it does not allocate costs to products and services. It can be viewed as business intelligence for profit maximization. Conceptually throughput accounting seeks to increase the velocity at which products move through an organization by eliminiating bottlenecks within the organization.


Cost (or Management) accounting is an organization's internal method used to measure efficiency. Since no one outside the organization uses such internal accounts for investment or other decisions, any methods that an organization finds helpful can be used.


Throughput accounting improves profit performance with better management decisions by using measurements that more closely reflect the effect of decisions on three critical monetary variables (throughput, inventory, and operating expense — defin…
Post a comment
Read more