Activity-based Costing: Advantages and Disadvantages

Activity-based costing can be an information system, that assigning source of information of cost to products or services based on the experience consume. The Economist, June 29th 2009, Activity-Based costing Thus, ABC can help the director to obtain more correct and up-to-date costing information to judge the cost budgeting to maximize income. (Metin Reyhanoglu, Activity-Based Costing System: Advantages and Disadvantage, Ankara School, Turkey, Pp. 2) In additional, ABC provides a business with exact cost information to boost company performance. In order to allow identify the products and prevent inefficient or unnecessary activities for cost reduction and type in the wrong software industry. (Turney 1991, Pp. 50) The ABC is become most popular since1980's from the increasing lack of relevance of traditional cost accounting of assigning costs and enhance its effectiveness to decision making define by British man's Robin Cooper and American's Robert Kaplan.

ABC system employs two stages to identify the cost. Firstly, is accumulates manufacturing overhead costs for every single activity consume; Secondly, determining the resources and activities ingest and then assigning the expenses to the merchandise, services and customers. ABC can be an alternative to Traditional Cost Accounting when a company's overheads are assigned in proportion to a activity's direct cost. This is dissatisfied whereas two systems which are absorbed the same costs but can use very different amount of over head. Hence, for a corporation using TCA system that make and more and more variety products would lead to large deficits. For the today's manufacturing, ABC systems is best suited to implemented for companies to customise products, this is because it can assigning indirect costs more effectively. While ABC look sophisticated whereas TCA is simple, because ABC required a lot of specializes knowledge to have the ability implemented correctly and positive results.

It is a proper know that the original cost accounting (TCA) is a systems usually assigns costs based on single level to methods such as labour hour, machine hour and etc. It really is arbitrarily assigning production costs overhead to products produced (and then product). It is an allocate developing costs right to products such as immediate labour hours, immediate labour costs or machine time. But TCA is fails in assigning non-manufacturing costs such as administrative expenditures since it is not soaked up in to products. This is grounds why the TCA system often article inaccurate in product cost compare to ABC system.

But in the problem, the company where there is a big diversify of products or high level of automation, thus, the overheads' misrepresentation will be significant in TCA system. Therefore, ABC system is more appropriate to adopt it can help the director to research more exact cost management than TCA system. ABC provides reliable information in computation product costs and is best practice for products and service profitability analysis. Therefore, today's processing the majority of the management recommendation using ABC to ascertain costs. When over head is high, diversify products, therefore cost of determine cost of miscalculation high and competitive is stiff thus ABC is able to calculate the complete cost of product equate to TCA. ABC system is help assess performance and set in place budget which can help the director to utilize this information to regulate and comparison purpose. To prevent over budget situation and conquer unstable occur. ABC can help the management to set clear picture of the target to guide the business toward given goal. For the TCA system is deciding the expense of production after the produces. Therefore, TCA system is nearly outdated whereas ABC system is become famous. ABC can provide more exact information in determine cost of product and control the quality of the products to prevent sacrificing by rival.

Advantages & Disadvantages

In the move forward production, many companies take up ABC system because its can offer more useful offer so that can reduce misrepresentation in product costs. ABC can offer more rational, relevance and accurate information to aid company computation more specific cost of product and analysis the performance, resulting in increase profitability dimension.

For the appropriate dimension of ABC that can help managers more effective at decision making. Therefore, a better decision can improve the management proper and tactical planning effectively, identify changes in unpredictable and allows managers to detect oversight become vital.

To be profitability, a firm must estimate its product costs in order to make its prices decision. Therefore, ABC system is a powerful product charging system appropriate to adopt. It can offer management with the vital information, timeliness and exact information to designed standard costs to compare the variance between actual costs. Management can analysis the mistake and take corrective action of variances. It can prevent error estimation product cost.

To remain before competition, the business must be offer goods and products of the good quality and right price for retain customers. Thus, the business is within interest the prices competitors set of their products. That is a significant factor for the company to decided cost of product and making decision whether is the right time to enter a new market. In the event the selling price placed too high lead to loss tons of loyal the customers and damages the company image. Therefore, the business must put together contingency arrange for changing needs of the market.

Although ABC can help director manage overhead and understand profitability of products and customers as well, despite professionals must be aware several limits.

For getting correct information is not easily, sometimes the company need spent great deal of that time period to accumulate data and investigate, that all is not free thus induced consume a whole lot of recruiting and precious time. It is a well know that the ABC system is not cost free. Lot of the company considers an ABC may very well be very costly to implementing. Because of ABC had not been updating because designs difficult and frustrating to develop. But discovered that ABC can only be implemented using companies from certain sectors because not absolutely all the companies suitable advanced system like ABC. For smaller businesses for choosing not put into action of the machine. Despite, some large businesses have discarded because of high maintenance and intricate to put into practice.

However, regardless of the claimed limitation of ABC, but nonetheless have company prefer to implementation of ABC system. Because its can offer most dependability and effective information. Eventhough ABC has used the majority of time and cost to assemble information but it can lead to get first-hand information for better tactical planning. The accurate information can help in lessening the waste, keeping time, and easily to identify the cost of product simultaneous cost save. ABC system can help reduce resources intake and boost revenue.

Around the earth, different companies have used ABC in order to minimize the costs and improve the profit. Within this paper would be discuss the adoption of ABC system in four (4) countries with different culture and business to discovered the factor that critical to implementation.

Case analysis one: Restaurant Industry in Tunisian

According to Amel B. Hadj Salem-Mhamdia and Bahia Bejar Ghadhab's "Value management and activity based costing model in Tunisian restaurant" article was reported that the travel and leisure industry play an important roles for Tunisian's income source and restaurant industry is highly competitive which is central to the success of the tourism industry.

Costing method play an important role to help expand develop the restaurant industry in Tunisian due to charging method might guide and/or indirect business lead the business to increase the income and minimize the price.

In this first case study, ABC system was effectively executed the "a la carte" style restaurant in Tunisia (only an individual restaurant in Tunisia). Thus, ABC system totally recommended adopting anticipated to in a position to determine exact cost of product in term of cost incurred of different activities involved in all menu items. It is because every different activity it can mainly straight affect the price in the menu. Thus, ABC system provides reliable and accurate information to analyze costs of the menu item and profitability measurement. In order to forecast the materials order, adjustment of recipe class, etc. Operation Department (Chef, Services staff) is very important to a restaurant, ABC system able to analysis the adjustment of operation salary, operation time, staff layout.

ABC system is a substantial advantage for restaurant industry; it can provide reliable information useful for general market trends and culture evaluation in service industry especially can improve of planning and cost control analysis. Simultaneous can directly recognized the restaurant's activities via client satisfaction survey analysis. To be able to help professionals make a good decision drive for restaurant's profitability and competitiveness. In the conclusion, ABC system has been recommended as an appropriate method for guiding and leading the process of making decision. ABC is a viable method to estimate product costing in restaurant and also perform a price sensitivity analysis in order to find out about the price elasticity habits of the menu. The ABC system can be discovering the fundamentals of service route and service experience in a particular culture environment.

Case review Two: Telecommunication Industry in Portuguese

According to the Maria Joao Martins Ferreira Major's "Management accounting change in Portuguese telecommunication Industry" article was reported the telecommunication company in the Portugal changed the management accounting system to be able to judge more accurate product cost and provide efficient information to improve your choice making.

In this subsequent case study, do in Portuguese telecommunications company call Marconi, the main activity of the company offers long distance telecommunication service. The Marconi's telecommunication business was operating in a monopoly company in Portugal, hence had not been facing any competition pressure concern. For today's industry, the telecommunication market in Portuguese become more and even more competition attack the market. Therefore, the Marconi required the supervisor with significant market ability should follow cost direction in order to justify the price. So the Marconi decided to put in place ABC system to be able to remain competitive and deliver more relevant and specific data that can be employed by the management.

In this research, the Marconi modified its TCA systems and substituted it with ABC system due to the company did not have a proper cost systems to control costs. ABC system, it provides reliable information can be used to calculation the price model which to meet the Portuguese telecommunication. The result of ABC system is highly recommendation to adopt in the telecommunication company in Portugal, since it can provide significant information to provide precise cost calculation of telecommunications' interconnections. Thus, the Western european commission clearly specified that the ABC system is appropriate used to allocate the common costs to the price tag on product.

Furthermore, ABC establishes an efficient managerial tool to aid supervisor in decision within the new business environment. In addition, ABC system can offer correct and up-to date information to support calculate product costing more specific through the allocation basis and helps managers better knowledge of the drivers on costs. Finally, the telecommunication company choosing ABC as the "right" costing system sacrificing TCA to be able to assist director evaluate interconnection prices proper more adequate was an important issue.

Case study Three: Hot Spring and coil Country Inn in Taiwan

According to Wen-Hsien Tsai and Jui-Ling Hsu's "activity-based costing: a research study in Taiwanese hot springtime Inn's cost calculation" article was reported the Hot Springtime Country Inn is operate a nontraditional style business in Yang-Ming-Shan part of Taiwan. The business is provides nontraditional lodging, hot spring and coil and meal portion services.

In this third research study, the united states Inn was forgone TCA and choose ABC as their costing management because ABC system is more practice and appropriate for the business and provides more appropriate information for evaluate cost management and costing set-up.

The ABC system is more applicable to utilize because the company has various products such as lodging, hot springtime and meal offering. Therefore, ABC system can offer more relevant and appropriate information to calculate the cost. For the diversify products thus the over head which indirectly traceable to the product, therefore proportion the over head of the full total cost is very significant. The ABC system more matter on the complete cost assigning and over head allocation. For instant, the united states Inn fully recognize the carried out ABC system is really more benefit and useful costing management. And ABC system provides more correct information for rates decision and make an improved decision.

Meanwhile, the Country Inn encounters on seasonal customer fluctuation unstable, while in winter the hot spring use can hit to the maximum whereas in summer season would drop least. Thus, using ABC system can beat this seasonal issue. The manager can implements ABC system to allocate resources costs predicated on activity consume and assign the overhead costs to product based on direct labour hour to defeat limitation of TCA system in order to determine more appropriate cost of product and stop losses. After the Country Inn adopts ABC system, the machine costs of each product in the market segment obviously clear and provides useful information to aid managers on decision making and cost-volume-profit analysis. Therefore, the united states Inn fully agrees choose the "right" priced at system and define activities well.

Case study Four: Automotive developing in American

According to Paul Jurek, Bert Bras, Tina Guldberg, Ji, D'Arcy, Seong-Chan Oh and Stephan Biller's "Activity-Based Costing put on automotive developing" article was reported the GM choose activity-based costing to judge demand and response offer from local tool company in an American automotive manufacturing industry. General Motors Company known as GM is produces vehicles & vehicles and markets & services these vehicles can be an American multinational car, and on the list of largest auto-producer on earth.

In this case study, automotive professional is a complicated, consume large amounts resources and high competitive. Because of the way to increase competitive advantages is execute ABC system to research the creation and operating cost to be able to reduce the expenses credited to ABC in a position to identify the cost in detailing for each production level and/or material cost. It can assist the operator for selection of material and/or development method, i. e. time of labour, amount of space, length of melding, efficiency of machinery.

Also, ABC in a position to recommend the demand and response for the product and this can help manufacturer to look for the cost allocation for source of information, material, marketing plan, etc. To conclude, ABC system is suited to huge production industrial even the use cost is high, because the come back in direct and indirect benefit or profit credited to of able to identify the cost in describing and helps to allocate more resources on profitability products.


As the study from different companies in above, ABC has exhibited resulting in produce more reliable, exact in costing management and cost-volume-profit examination. Thus, those companies fully agree the ABC system is a more appropriate costing system to use for the nowadays. Despite, the ABC system cost expensive and used most of time, but those companies still inclined to look at ABC reducing TCA in order to overcome restriction of TCA. ABC systems identify easily to ascertain the expense of product, reduce the waste material and simultaneous save cost. Therefore, ABC system appropriate adopt for the company. To summarize, ABC system can offer correct information for resulting in better decision, strategy planning and forecasting for future development.

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