The method of cost allocation is relatively more expensive compared to conventional costing methods. Another demerit is that the method requires skilled personnel to calculate and allocate costs to the products (Hansen Mowen & Guan, 2009)
The method uses many estimates thus prone to inaccurate determination of product overhead. The use of traditional costing methods results to under or over costing of products (Vanderbeck, 2012)
It may then be too late to readjust the strategy to better meet the organizational demands of Vicxo Software. Also, this type of control considers numerous standards, which are taken for granted (Barnat, 2005)
The table below shows how it would assess the performances of the three customer channels: Store Catalog Internet Revenue Number of Calls Cost Per Call Call-Center Costs Net Revenue Margin Source: Chellasamy and Ligy, 2008 Using the Activity-Based Costing system, the manager of the organization would realize that despite an immense usage of resources, the catalog channel is less profitable than the internet and the store channels. The consequent decision then, would be to increase the profitability and efficiency of the catalog channel, rather than further invest in it and achieve increased resource consumption without any real profit (Chellasamy and Ligy, 2008)
This basically means that with the aid of the ABC, managers are able to know how much they have lost due to machine malfunctioning, product damaging, increased inventory costs or time spent waiting for a machine component to be replaced. "Activity-Based Costing therefore gives not only much better cost control, but increasingly, it also gives result control" (Drucker, 2006)
Another difference between the traditional systems and ABC resides in the procedures followed in their implementation. They can be succinctly presented as follows: Traditional methods: Cost centres are identified and established within the organisation Cost centres may be producing or service centres Wherever possible a direct charge is made to a cost centre ie allocated overhead Where overhead is jointly incurred it is apportioned to the cost centres on an equitable base The overhead cost for the service centre is then transferred to producing centres The total overhead cost for each producing centre is then divided by for example, machine or labour hours per the cost centre An overhead recovery rate results This is then used to absorb the overhead to products If planned activity levels are actually achieved then overhead may be fully recovered in the short run" (Dunn
It assigns costs to activities based on their consumption of resources and then allocates costs to cost objects based on their required activities. The focus of ABC is on accurate information about the true cost of products, services, processes, activities, distribution channels, customer segments, contracts and projects" (Gunasekaran, Williams and McGaughey, 2005)
Overheads basically refer to the indirect costs incurred by an organization (on daily basis) and can be more specifically named in terms of "indirect materials, indirect employee costs and indirect expenses which are not directly identifiable or allocable to a cost object in an economically feasible way" (Northern India Regional Council, 2004). Basically, overhead costs integrate all costs on the balance sheet, aside from the direct material and direct labor costs (Hauff, 2008)
The basic criteria used to answer these questions are derived from: (1) the strategy and action plans developed to implement strategy; and (2) the performance results that strategy is expected to produce. If a deviation occurs, then feedback takes place and the strategic management process recycles" (Schendel and Hofer, 1979)
To better understand how Activity-Based Costing influences managerial decisions, one should look at a real life example. This has been offered by Chellasamy and Ligy (2008) and they present how simple allocation and ABC method could lead to different results, leading as such the manager to wrongful, or at least different, decisions
The one figure results in a breakeven situation, barring any unforeseen costs -- which is almost never the case in manufacturing or in small business enterprises -- and the lowest figure results in a net loss to Lewis Company. This exercise is has been an excellent demonstration of the importance of understanding the divergence that accounting methods generate, and the pitfalls that await a naive manager (Gregory, 2012)
To say that these two methods are simply alternative approaches would be a misstatement since the two costing systems can generate substantively different figures with regard to net operating income ("Accounting for Management," 2012). Absorption costing treats all production costs as product costs whether fixed or variable (Hermanson, 2011)
No additional variable selling costs or administrative costs will be incurred by Lewis Company during the manufacture of Product C. The Cost of Goods Sold (COGS) includes any direct costs that are associated with manufacture of the product sold by a company (Walter, 2011)
The budget provided can be used for control purposes by the principal or dean of the school to monitor the spending across the terms. Operational efficiency is critical in a small organization such as this, particularly during the launch and the initial years of providing the program (Churchill, 1984)
00. These figures reflect an economy of scale that is based on the regulated fixed costs (Hermanson, et al
If enrollment figures drop to 66 students, the school will be operating in the red (-$29,492). The primary issue with breakeven analysis in the public school sector is that certain fixed costs are under regulatory control and cannot be adjusted (Richards, 2013)
The net result can still be acceptable, so measures to adjust the budget should generally proceed after careful scrutiny and some historical analysis. Naturally, when an enterprise is just launching, there may not be any historical figures to compare to the current budget, so cyclic or seasonal spending variations may not be particularly evident (Walter, 2011)
In the former case, formal contract theory modeling of managerial accounting issues has provided important insights into the design and role of managerial accounting systems. In the latter case, many of the hypotheses tested in recent behavioral and empirical research in managerial accounting have been derived from informal reasoning based on contract theory (Bhimani,2006, 37)
In part, the failure of managerial accountants led to the failure of these firms. As such successful accountants must conduct themselves in ways that reflect integrity and ethical behavior (Waters & Chant,
Literature regarding risk management as a function of the levers of control was also sought. One of the most interesting phenomenon noticed regarding changes in management control systems in Simons' framework is the fact that companies unused to dealing with uncertainty are more likely to change managerial practices and controls in a drastic manner in response to shifts in conditions when compared to companies that operate in an environment of greater uncertainty to begin with (Asel 2009, pp