Activity Based Costing Case Study

As Traditional Cost Accounting(TCA) is becoming obsolete with each passing day since it does not gives up the in-depth picture of the cost structure of a company, the need to study the new innovative approach of Activity Based Costing becomes more and more relevant. This paper thus tries to research the reasons as to why and how ABC triumphs over TCA. Also, since it is important to look at both sides of the coin, the need to understand the limitations and the factors governing the success of ABC should also be considered. The understanding of this concept thus helps understand how it can increase the efficiency and productivity of an organization by targeting the direct and indirect costs and hence opening up lots of opportunities to improve

If a company looks at its costing from the perspective of the activities it undertakes, it will help the company to choose which activities are the most valued for it. Once identified the company can focus and improve that activity giving it a competitive advantage. A Company can incorporate the following various processes of ABC to create high-valued and high-quality products:
• Product Pricing: Every activity is assigned a cost in ABC method and as a result the total cost for the whole product/service can be accurately found out. This can thus help us identify the redundancies or increase in costs.
• Product Design: Identifying activities that create value for product/service and those which do not. This helps to assign and allocate resources and capital to valued products and inherent activities in a much better way.
• Product Profitability Analysis: Capital and resources can also be effectively assigned when the profitability can be analyzed product wise. So the products/services which are giving the most profits should be given more importance and the other products should be given less importance or dropped as per the

Identification of activities which are required by the manufacturing firms in designing or building a specific product. These activities can include planning, procurement and supply of raw materials and finished goods and quality check.
II. Allocation of resources by the firms to the activities identified in the first step. Based on previous data, the company decides how much cost drivers are consumed in each activity.
III. Selecting the activity cost drivers to the products. With the help of these cost drivers, the company is able to estimate the not only effort needed to manufacture a particular product but also whether that product needs to be manufactured in the first place. They also help to improve the processes and correct the defects in the processes.
IV. Relating cost driver rates to the products. This is done through cost drivers which help in linking the cost objects to the cost of performing activities on that cost object and measures the rate at which the cost increases with the increase in quantity of that cost object. Exhibit-2 shows some of the activities and the cost drivers linked to those activities that are used in the manufacturing industry.

In the manufacturing industry, the implementation of this process is beneficial in two major