http://www.gcecloud.com/blog/accounting-technology-blog/is-accounting-technology-bringing-back-activity-based-costing What is your opinion on the article above based on process costing? Two...
What is your opinion on the article above based on process costing? Two meaningful response would be helpful.
This is a managerial accounting class.
Let's first define what is process costing. In the business field, as well as in the field of manufacturing, "costing" is a practice where the monetary value of a product manufactured in mass is determined by the different processes that were in place to produce that product. The more complex and unique the processes, the more money they may demand.
Process costing is mainly used by industries that use common or standard practices (processes) to produce materials that are quite similar. The costs of manufacturing include the materials used, shelf life, and the work spent during the process of production.
The article "Is Accounting Technology Bringing Back Activity-Based Costing?" talks about ABC (Activity-Based Costing), which is a different way of assigning cost to a product. The way in which ABC differs from process is that ABC will calculate ahead of time a number of variables that also take place during the process of manufacturing.
Activity based costing assigns the costs indirectly and bases the value on the requirements of each activity. The cost of an ABC based price will include variables such as changes in product design, inspections ran on the product, set-ups required to produce and manufactor the product, and other determinants that are more specific but that ultimatel DO matter to give fair pricing when it is due.
The article cites that ABC was a very popular method back in its day because companies such as Chrysler could enjoy assigning higher prices to its products based on the high-skilled level of activity required to produce their vehicles.
Yet, ABC is a complex process and a lot of variables are at stake. Hence, companies with a lot of money to spend on statisticians, researchers, and quality assurance personell can easily itemize all the effort that it takes to make their product and assign a higher cost to them. As a result they also earn a reputation for being "expensive because they are worth it". Kind of like the paradigm that something expensive is equally unique and sophisticated.
However, in cases where there IS a lot of work involved in the creation of a unique product, then ABC would be much more fair than traditional process costing because it will take into consideration those "little extras" that DO cost extra.
A traditional costing model wouldn’t charge two different prices for the two widgets despite the fact that the latter requires significantly more time from experts in the company. ABC, on the other hand, more accurately assesses the costs of products and services. For companies that offer customized widgets or services, this can prevent huge losses.
The article tells us that, since not everyone has the money for researching activity-based things, the ABC was let go by many companies who chose to outsource for cheapter manufacturers. However, this was before the advent of the 2.0 and the exposion of technology. This is why perhaps it is now better than ever to go back to ABC.
Since a computer algorythm can be programmed to conduct specific research filters, ABC can be done without human aid. Hence, it is now cheaper to apply ABC to costing, and to give fair value where it is due.
Before reading the article, I had never heard of Activity Based Costing. But it seems like such a practical and useful concept. By calculating total inputs of a good or service, companies are able to minimize loss and promote more economical procedures. The fact that it has become a much simpler practice helps promote it in today's business industry.
What I understood from the article is that it is now much simpler to use this practice that it had been in the past because it is easier to receive and save big pieces of data. The figures and facts that it takes to use the ABC method are easier to obtain, so it has become more practical.