Activity Based Costing Essay

Activity Based Costing Essay

Numerous articles have been written about Activity–Based costing (ABC) system since it was first introduced back in mid 1980's. It was generally characterized as the only costing system that could accurately depict and represent product cost in a highly relative complex and complicated business environment. Combined with Activity–Based Management (ABM), ABC aligns the company's strategic objectives with its product costing system as it distinguishes non–value added activities and determines areas where costs can be possibility reduced (Hughes & Gjerde, 2003).



As aforementioned by Ness and Cucuzza in their article, activity–based management helps organizations to overpower and outperform other existing organizations. Making them the company ... Show more content on Helpwriting.net ...Critical analysis of the weaknesses of the model revealed that ABC system led to over–precision in processes in collecting the data, which resulted in comparably expensive maintenance. To save costs, the figures were not always updated. As a consequence of this weakness, there is a build up of the lack of trust to the system. Hence, managers established their decisions on marginal thinking and good intuition that were scarcely fostered by data and information. In conclusion from the interviews, senior managers are convinced that ABC system did not provide them sufficient support for strategic decision–making and instead resorted to implementing the global decision–making methodology (GDM); a simple practical method for organizational decision–making (Geri & Ronen, 2005).

In contrast to the fall of activity–based costing system as stressed above, some may still find it as a beneficial tool that accountants can use to promote better management reporting and decision– making. Nonetheless, one must understand the intrinsic underlying assumptions of ABC, from which it assumes "homogenous cost drivers drive the costs in each pool" and "the costs in each pool are strictly proportional to the activity", and how contravening these assumptions might result to cost distortions that may negatively affect management decisions (Latshaw & Cortese–Danile,

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