Studies in Business and Economics

Studies in Business and Economics

https://www.degruyter.com/view/j/sbe.2019.14.issue-1/sbe-2019-0015/sbe-2019-0015.xml

Summary

The activity-based costing system majored in its line of thinking that it was essential to include all costs that are incurred in the production process of a commodity, including the fees of overheads along with direct material and labor. It mainly takes into account all the value of every activity in production point. The method was more advanced compared to the Traditional costing system that only considered the cost incurred on direct materials and labor to determine the value of producing a product(Park et al., 2019). ABC argues that products use activities in the production process, while activities use resources.

Taking marketing as an example. All the activities that consume money and resources have to be included. Marketing costs and strategies to enable an organization to sell its product are considered relevant, such as Motivational activities, modification of a product to make the customer satisfied, supply of goods and services to the customers, awareness of the customers to be to understand that the products are available in the market and all other activities related to physical distribution of the product has to be taken into account (Park et al., 2019). The cost of productions of that particular product, together with the cost of marketing, is considered so as to determine the total cost of the product..

Costs of the product are determined per the department to determine the final price. For example, in particular, department workers are interviewed along with their specific tools of production to determine the duration used in the production process of the different products then the total cost centers are assigned to each activity pool with respect to time spent in the production of that product.

Reactions

An activity-based costing system is a way of checking all the activities that are involved in the production of a product. This method is useful in the reduction of costs by availing useful information on ideas of reducing costs. This is done by concentrating on activities that only add value to the product. This method is also useful in determining the actual price of a particular product after determining all the costs allocated to that product. Clear evidence on the value of a good helps the organization leadership to implement suitable improvement approaches. ABC is useful in determining the total cost of different departments in the manufacturing process as each department has to record their expenses differently, which also helps in the ideas of determining the actual price of a product. However, the activity-based costing system is costly for small companies.

References

Park, Y., Jung, S., &Jahmani, Y. (2019). Time-Driven Activity-Based Costing Systems for Marketing Decisions. Studies in Business and Economics, 14(1), 191-207.