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Activity Based Costing and Top Management:

Experts agree on several essential characteristics of any successful implementation of activity based costing. First, the initiative to implement activity based costing must be strongly supported by top level managers. Second, the design and implementation of an ABC system should be the responsibility of cross functional team rather than of the accounting department. The team should include representatives from each area that will use the date provided by the ABC system. Ordinarily, this would include representatives from marketing, production, engineering and top management as well as technically trained accounting staff. An outside consultant who specializes in activity based costing may serve as and advisor to the team.

The reason for insisting on strong top management support and a multifunction team approach is rooted in the fact that it is difficult to implement changes in organizations unless those changes have the full support of those who are affected. activity based costing changes the "rules of the game" since it changes some of the key measures that managers use for their decision making and for evaluating individuals' performance. Unless the managers who are directly affected by the changes in the rules have a say, resistance will be inevitable. In addition, designing a good ABC system requires intimate knowledge of many parts of the organization's overall operations. Top management must support the initiative for two reasons. First, without leadership from top management, some managers may not see any reason to change. Second, if top managers do not support the ABC system and continue to play the game by the old rules, their subordinates will quickly get the message that ABC is not important and they they will abandon the ABC initiative. Time after time, when accountants have attempted to implement an ABC system on their own without top-management support and active cooperation from other managers, the results have been ignored.

Relevant Articles:

Definition and Explanation of Activity Based Costing
Treatment of Costs Under Activity Based Costing (ABC) System
Activity Based Costing and Top Management
Activity Based Costing, GAAP and External Reports
Designing and Implementing Activity Based Costing System
Targeting Process Improvements
Advantages, Disadvantages and Limitations of Activity Based Costing
Activity Based Costing Example

 

 

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Financial Accounting Topics


  Introduction to Accounting
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  Transactions and Accounting Equation
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  Analysis of Business Transactions
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  Journal, Ledger and Trial Balance
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  Accounting for Bills of Exchange
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  Special Journals
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  Cash Book
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Bank Reconciliation Statement
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  Final Accounts
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  Work Sheet
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  Capital and Revenue Items
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  Valuation of Inventories
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  Accounts of Non-profit Making Organizations
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  Statement of Cash Flows
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  Accounting Ratios Analysis
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  Depreciation, Provisions and Reserves
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  Accounting Dictionary
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  Financial Calculators
 
 
 
Managerial Accounting Topics

  Financial Statements
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  Cost Volume Profit Relationship
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  Variable Costing System
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  Materials and Inventory Cost Control
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  Activity Based Costing System
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  Standard Costing and Variance Analysis
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  Balanced Scorecard
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  Capital Investment Analysis/Capital Budgeting
 

 

 

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