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MP214 MANAGERIAL ACCOUNTING

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Activity Based Costing (ABC) has been recommended as an alternative to traditional cost allocation methods due to its ability to provide more accurate costing of products/services. The adoption of ABC has however received a mixed reaction in terms of its adoption by organisations. Assume that you are a group of management accounting trainees working in a manufacturing organisation with multiple products and your supervisor is considering the adoption of ABC in your organisation. You have been asked to prepare a report for your supervisor that meets the following requirements.

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Question Preview:

Activity Based Costing (ABC) has been recommended as an alternative to traditional cost allocation methods due to its ability to provide more accurate costing of products/services. The adoption of ABC has however received a mixed reaction in terms of its adoption by organisations. Assume that you are a group of management accounting trainees working in a manufacturing organisation with multiple products and your supervisor is considering the adoption of ABC in your organisation. You have been asked to prepare a report for your supervisor that meets the following requirements.

Undertake research of the literature (academic and professional) and provide a report that outlines the experience (positive and negative) of organisations over the past ten years following the adoption of ABC. Based on your research provide a recommendation to your supervisor on whether ABC should be adopted in your organisation. 

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Solution preview

ABC recognizes the actual nature of cost comportment and supports in decreasing costs and classifying actions which do not enhance worth to the product. The managers with the adoption of ABC are in a better position to regulate many fixed overhead costs. This is being done by putting a better control over the actions which actually cause these fixed overhead costs (" Advantages and Demerits of Activity Based Costing (ABC)", 2019).

 

ABC helps the organization to bring correctness and consistency in determining the various costs related to the product. It helps to understand that the cost is caused due to activities and not products. ABC helps to deliver more accurate product costs.

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