Management Accounting Common Activity Based Costing

Question: Describe about the Management Accounting for Common Activity Based Costing. Answer: Activity Based Costing, commonly known as ABC, method helps to identify each and every activity of a manufacturing company and cost them based on the resources they have taken. Activity Based Costing has a lot of importance in the costing process. The contemporary manufacturing companies can be benefitted by ABC in various ways. They are discussed below. Activity Based Costing is an accurate and reliable process to ascertain cost. This process focuses on cause and effect relationship between activities and products. According to ABC, costs are caused by activities and activities are consumed by products. Due to logical process, it is possible for the manufacturing companies to get the actual real cost of the products without any error and the information about the costs can be stored for the future references (Kaplan and Atkinson 2015). ABC helps to recognize those activities which do not add value to the product as there are some activities in the production process which only consume resources but produce nothing. By applying ABC method, these activities can be omitted from the production process. The cost behavior can be identified more accurately and it helps to reduce the cost of each product. As ABC use various cost drivers, all the information can be obtained which is a useful tool or the cost mangers to ascertain the cost. To design the cost structure of a new product, the cost drivers are an important tool (DRURY 2013). At the time of the implementation of Activity Based Costing in the business, all the production process is analyzed in depth. This process helps to find the flaws and loopholes in the manufacturing process which helps to improve the manufacturing process in the company. One of the main advantages of ABC is that this process can be applied to the whole business system apart from only cost management because of its easy understandable nature. As the Activity-Based Costing method is an error free method and the exact information about the costs can be obtained, this process helps to identify the wasteful products in the manufacturing process. This process singles out the unnecessary products from the production process and helps to manage the costs more effectively. This procedure ends up in minimization of production cost and reasonable pricing (Schnsleben 2016). Activity-Based Costing method helps to price a product more reasonably. In traditional costing method, some unnecessary extra costs always price the products high. But in Activity Based Costing, one can get the accurate information about the costs. As a result, the cost managers can price the products accurately and the profitability of the company increases (Dong, Liu and Lin 2014). Activity Based Costing helps to fix the selling price for more than one product fairly. The reason behind this is in ABC method, the allocation of overhead is based on the cost drivers. Activity Based Costing helps to diversify the manufactured products like low volume products, high volume products etc. This process of costing is one of the best mechanisms for management of cost. References Dong, J., Liu, C. and Lin, Z., 2014. Charging infrastructure planning for promoting battery electric vehicles: An activity-based approach using multiday travel data.Transportation Research Part C: Emerging Technologies,38, pp.44-55. DRURY, C.M., 2013.Management and cost accounting. Springer. Kaplan, R.S. and Atkinson, A.A., 2015.Advanced management accounting. PHI Learning. Schnsleben, P., 2016.Integral logistics management: Operations and supply chain management within and across companies. CRC Press.