Essay on Activity Based Costing

2525 Words May 16th, 2014 11 Pages

The purpose of this report is to present a comparison of the profits of E-Commerce consulting and Information Systems consulting lines of DBS Consulting Services, using the Activity-Based Costing system (ABC) and the conventional costing system based on computing hours.

ABC provides more detailed and accurate information than the conventional costing system because ABC is based on consumption of resources by production of a product or service line and focuses on the activities that drive costs, recognising that activities consume resources. The conventional method allocates overhead costs based on hours consumed (in this case computing hours), which may not represent the actual consumption of
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The size, products, services and budget of a company will determine whether ABC is the appropriate costing system to implement.

ABC attributes costs more accurately
If management implemented an ABC system, it should expect to have a more thorough understanding of product costs. By breaking down costs into cost drivers, i.e. those activities that drive the costs, management should be able to see the relationship between product complexity, product volume, and product cost. This would be vital information for pricing decisions and profitability strategies. Management should also be able to streamline the production process by reducing those non-value adding activities such as set ups and travel time between customers.

ABC allows management to effectively create budgets
ABC allows management to effectively create budgets by clearly showing the relationship between costs and service production for different service levels. ABC clearly shows a company’s overhead costs, and management is able to budget for such costs accordingly. Budgeting based on ABC can replace conventional/traditional budgeting that is based solely on a company’s expenses. Budgeting is an important aspect within an organisation because the allocation of resources is based on the budget and ABC provides this.

ABC is expensive to implement
Implementing an ABC system is more expensive than implementing a conventional costing system. Not

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