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In chapter six, the authors showed how the ABC application was used in the construction industry, comparing three types of rebar used for specific construction projects. It was shown that the company
In chapter six, the authors showed how the ABC application was used in the construction industry, comparing three types of rebar used for specific construction projects. It was shown that the company had undercosted two of the types of rebar, while the third type of rebar was overcosted. With this example in mind, consider the following issues.
Why is the ABC described in the reading this week, unacceptable for external financial reports?
In what fundamental ways does ABC differ from traditional costing methods, such as those described in Chapter 4?
Why are top management support and cross-functional involvement crucial when attempting to implement an ABC system?
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Activity-based costing is designed to be used for internal decision making. Whereas, traditional absorption costing is designed to provide data for external financial reports. Generally, the activity-based costing provides more accurate product costs than traditional absorption costing. In addition, the first stage allocations are based on the results of interviews and not verifiable objective data. However, the reason it is not used for external financial reports is because of three reasons: 1. non-manufacturing and manufacturing costs may be assigned to products, if they are on a cause and effect basis, 2. some of the manufacturing costs may be excluded from product costs, and 3. numerous overhead cost pools are used and each has their own unique measure of activity. The fundamental ways that activity-based costing is different from traditional costing methods is that in traditional method, all product costs are accumulated and a pre-determined overhead rate is established. Absorption-based costing is calculated by dividing each activity into cost pools, then an overhead rate is uniquely applied to each product (Noreen, 2016). The reason that top management support and cross-functional involvement crucial when attempting to implement an activity-based costing system is because management is able to provide leadership to all the employees to generate motivation and embrace the activity-based costing system. Additionally, managers have the power to associate worker performance and evaluations to the activity-based costing. Cross-functional involvement helps design and provide intimate knowledge of operations that is required to design an effective absorption-based costing system. Furthermore, the knowledge from cross-functional managers lessens the resistance to absorption-based costing because they feel included and part of the process.
Noreen, E. (2016). Managerial Accounting for Managers. (4th ed). McGraw-Hill/Irwin.
ABC or activity-based costing is referred to as a bucket in which funds are put into in which funds are used for single activities It would depend on product and how many products are being used or what will be done with products. managers would have to think about overhead cost as well as direct labor hours and maybe machine operator hours, and maybe even the goal of overhead cost involved. Mangers would have a problem when it comes to financial aspect when it comes to doing reports. ABC is also referred to a detailed financial report form which can be used for reports which can change as well as be prepared for decision making within a company. Management can use as for mainly for auditing, but managers can use for other research within company level.
Managers can use ABC and should use the design to run a company as well as be knowledgeable and use for operations and make a effective operation.
Noreen, E., Brewer, P., & Garrison, R. (2016). Managerial Accounting for Managers. (4th ed.). McGraw-Hill/Irwin.