ACTIVITY BASED COSTING

Activity Based costing



Activity-based Costing

Introduction

This assignment is based on two tasks, with the main focus on the application of activity based costing system. The first task relates to assessing the advantages of the activity based costing system as compared to the traditional methods of costing while the second task is connected to the practical application of ABC system in which we will assess the efficiency of Westend branch of eth Brookes Bank plc in terms of realizing its overhead costs of certain categories of transactions using the ABC costing system.

Based on the analysis, we found out that the branch is making certain flaws in its operations that is plaguing the performance of the bank and creating hurdles for it. A new strategy, keeping in mind the results of the ABC costing analysis, can go a long way in assisting the branch operations manager to improve upon the branch banking operations. Utilizing the benefits of the ABC costing system, the branch can realize real-time benefits and improvements inn its functions.

Task 1: Discussion of the Statement: “Activity-based costing is superior to traditional absorption costing and all firms should implement it”.

In the modern era, accountants are particularly concerned about devising an ideal system for cost analysis, which can realize the most realistic forms of costs incurred so that they reach the most accurate decisions. Compared to traditional accounting, activity based costing is a decision making tool which provides more accurate cost and profit information and allows management to understand the cost and profit drivers and improve their business. The system of Activity based costing is especially useful for companies that are subjected to strong price pressures in the market and want to know exactly the composition of the cost of products (Ness, Cucuzza, 1995, pp. 138).

Moreover, it is also useful in companies with high-end products with different manufacturing processes and it is difficult to know the proportion of factors that affect the product. Also this system of cost analysis is employed for companies with high overheads and under great strategic and organizational changes. There are many theoretical and practical assumptions that clearly outline the advantages of activity-based costing systems and provide a justification for giving preference to activity based costing systems over the traditional absorption costing. Before we discuss the superiority of ABC system, let us see how it differentiates from the traditional absorption system. Unlike the traditional absorption costing ABC system determines unit costs more accurate and timely standards of products and is based on the concept of Value Chain (Stratton, Desroches, Lawson, 2009, pp. 40). The ABC concept involves more personnel processes as compared to traditional absorption costing systems, giving rise to a stronger link to the activities between departments. Although it is noted that should be familiar with all employees of the company to book or not. This costing system is applicable to different types of firms (manufacturing and service), to calculate more accurately the costs.

Traditional cost system follows mentioned principles:

• Traditional costing used cost ...