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Designing and Implementing Activity Based Costing (ABC) System:

Experts agree on several essential characteristics of any successful implementation of activity based costing system.

First, the initiative to implement activity based costing must be strongly supported by top management. Second, the design and implementation of activity based costing system should be the responsibility of a cross functional team rather than of the accounting department. The team should include representatives from each area that will use the data provided by the activity based costing system. Ordinarily, this would include representatives from marketing, production, engineering and top management as well as technically trained accounting staff. An out side consultant who specializes in activity based costing system serve as an advisor to the team.

The reason for insisting on strong top management support and a multifunction team approach is rooted in the fact that implementing activity based costing system is difficult 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 activity based costing system requires intimate knowledge of many parts of the organization's overall operations. This knowledge can only come from the people who are familiar with those operations.

Implementation of activity based costing system must be initiated by top management due to 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 will abandon the ABC initiative. Time after time, when accountants have attempted to implement an ABC system on their own with top-management support and active cooperation from other managers, the results have been ignored.

For designing and implementing activity based costing system, management should carefully study the existing cost accounting system and review the articles in professionals and trade journals. In most of the organizations, the new activity based costing system supplement, rather than replace, the existing cost accounting system, which continues to be used for external financial reports. The following chart explains the general structure of activity based (ABC) costing model.

The Activity Based Costing Model

Cost Objects
(e.g., products and customers)
Activities
Consumption of Resources
Cost

Usually, company's traditional cost accounting system adequately measures the direct material and direct labor costs of products since these costs are directly traced to products. In most of the organizations activity based costing study is usually concerned solely with the other costs of the company - manufacturing overhead and selling, general, and administrative costs.

The activity based costing implementation team should carefully plan about implementing activity based costing. Implementation process may be broken down into the following six basic steps.

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

 

 

A D V E R T I S E M E N T

 

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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