Activity-based Costing

Seminar paper from the year 2007 in the subject Business economics - Controlling, grade: 1,3, University of Applied Sciences Wildau (WIT Wildau), course: Managerial Accounting, 18 entries in the bibliography, language: English, abstract: Activity-based costing first gained publicity in the early 1980s. It was developed as a logicalalternative ...

Seminar paper from the year 2007 in the subject Business economics - Controlling, grade: 1,3, University of Applied Sciences Wildau (WIT Wildau), course: Managerial Accounting, language: English, abstract: Activity-based costing first gained publicity in the early 1980s. It was developed as a logicalalternative to traditional cost management systems that tended to produce insufficient resultswhen it came to allocating costs. Harvard Business School Professor Robert S. Kaplan was anearly advocate of the ABC system.Due to a changing business world and strong competition, the cost structure in manycompanies changed, while facing an increased price pressure. When profit margins aredecreasing, companies are focusing not only on external but also internal opportunities toimprove their cost structures and to make hidden costs transparent. This lead to theintroduction of Activity-based costing (ABC) as a new approach of process thinking to makethe internal organization more flexible to react to changes in the production process andallocation of costs as well as to deal with overcapacities. This paper will focus on the ABC tool, which is aiming at transparency, efficiency increase and improvement of the given cost calculation systems. The ABC method enables management to optimize the enterprise with detailed information fora thorough decision making process. ABC is a method for developing cost estimates, based on the activities used within theproduction process per cost object. To develop a cost estimate the most important activitieswithin the production cycle – the cost drivers - need to be identified. The activity must bedefinable and measured in units, e.g. number of man hours. After all activities for producingthe product are known, a cost estimate is prepared for each activity. These individual costestimates contain all labour, materials and equipment costs, including overhead, for eachactivity. Each complete individual estimate is added to the others to obtain an overallestimate. To gain sufficient cost estimates, data must be collected and verified to make ABC afunctional and precise tool. This chapter leads through the necessary steps to implement theABC approach and its methodology.