Absorption Cost Systems

Absorption Cost Systems

• Title/Abstract

This article is focused on Efficiency based absorption (EBAC) method, which is an improved methodology for absorption costing. EBAC is an algorithm that absorbs costs according to their Efficiency. The results of this method are compared with results from other methods like ABC to prove its Efficiency. This method is both convenient and easy in companies using ABC method since they can utilize it without gathering any more information. The keywords used include activity-based costing, Efficiency based absorption costing, traditional costing and absorption costing.

• Introduction

The main problem facing traditional cost and management accounting systems, majorly in the absorption costing is the current technology and the modern business environment. Traditional costing systems are becoming less efficient as a result of the perceived gap in their timeliness (Benjamin et al. 2009). Todays’ manufacturing environment is, for instance, more capital intensive as opposed to the traditional labor-intensive environment. The problem-focused in the article is ‘blanket overhead

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rate’ utilized by ABC and TCS methods, forming their point of weakness in cost allocation.

• Literature Review:

The article has utilized a theoretical literature review by accumulating a list of concepts, theories, and phenomena on the absorption costing problem. The literature has used 21 sources to convey to support its data. There exists disagreement on the advantages of marginal or variable costing and absorption costing methods (Benjamin et al. 2009). Traditional costing systems were majorly used in the manufacturing industry, which focuses on the absorption of production overheads. With changes in technology, manufacturing has gradually changed from labor-intensive to capital intensive. Besides, there is an increased use of computerized and automated services in place of labor hours. Therefore labor costs account for a minimal part of a company’s total cost. ABC method was adopted due to the need for more accurate costing of products. The article provides a figure and process of the ABC method

• Data Analysis:

A mixed methodology was utilized in the report. The authors proposed the utilization of the EABC method since it considers various levels of overhead utilization efficiency for different products (Benjamin et al. 2009). Energy is a significant determinant in calculating the absorption rate. EBAC, like ABC, is applicable in all industries, including retail, manufacturing, and service industries. Three scenarios indicating the application of EBAC in the three sectors are provided.

• Results/Conclusion:

The data analysis in the article for the three industries has proved the Efficiency and accuracy of the EBAC system as opposed to the TCS and ABC method. EBAC is the result of research for a more accurate and efficient method for absorbing cost as a result of the weakness in activity-based costing and traditional costing systems. To proof its Efficiency, the results of EBAC are compared to ABC results. The use of more efficient and accurate EBAC leads to major cost changes when compared to TCS and ABC methods. Thus, the authors have clearly outlined the implications of less efficient ABC and TCS methods for the reader. The conclusions of the study prove that the EBAC method is the most efficient absorption cost systems applicable.

References

Benjamin, S. J., Muthaiyah, S., & Marathamuthu, M. S. (2009). An improved methodology for absorption costing: Efficiency based absorption costing (EBAC). Journal of Applied Business Research (JABR), 25(6). Retrieved from; https://clutejournals.com/index.php/JABR/article/view/998