The controller of a retail company has just had a $50,000 request to implement an ABC system quickly turned down. A senior VP, in rejecting the request, noted, “Given a choice, I will always prefer a $50,000 investment in improving things a customer sees or experiences, such as our shelves or store layout. How does a customer benefit by our spending $50,000 on a supposedly better accounting system?”. How would you respond to the VP? What value does ABC provide to customers, if any? What are “selling” point that should be noted about the benefits of ABC?
Cost allocation is an important function in any firm. It determines the amount the firm is going to spend in order to deliver the products to the customer. Resources are always scarce. In the case study, the VP suggests that the $50,000 could be used to improve customer experience, the benefits may be instant. However, in the long term, some costs activities may not be clearly identified hence the loss of resources. The use of Activity Based Costing (ABC) system is inevitable as it provides accuracy and efficiency in the allocation of resources.
ABC costing is a modern cost accounting system that focuses on costing and monitoring tasks (Kaplan and Atkinson, 2015). Business activities are divided into cost pools that are henceforth used as the base for allocating resources. The traditional methods of cost do not capture how resources are allocated accurately. The primary aim for ABC system is to ensure the resources are utilized effectively. ABC is focused on the cost drivers. As such it is easy to monitor the costs and make prudent decisions. The selling points for the ABC system include accuracy in identifying and monitoring the cost of products and services. Through the reports generated, the firm is able to understand the allocations in the overheads and cost drivers. Further, activities are clearly identified hence the management is able to peruse the goals set for the overall costs. The system may not be adaptable to making all the decisions. The best decisions to be made using the system is on pricing and product prioritization decisions (Mahal and Hossain (2015). Caution should, therefore, be taken to identify the need to use the ABC system. In any case, business should be able to fully identify the benefits as well as the costs that are associated with adopting the system.
Mahal, I., & Hossain, A. (2015). Activity-Based Costing (ABC)–An Effective Tool for Better Management. Research Journal of Finance and Accounting, 6(4), 66-74.
Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting. PHI Learning.
by EssayRoyal, Nov. 7, 2019, 3:15 p.m.