As a result, the activity based costing method is the perfect curve for solving the problems of cost allocation within an organization and there are many companies in the world choose to use Activity-Based costing method. If we want to know what the budgeting process is, we should first learn what a budget is. Budget is a plan expressed in money, and it’s also a financial plan of action for specific future periods for individual units and for the firm as a single
Once costs of the activities have been identified, the cost of each activity is attributed to each product to the extent that the product uses the activity. In this way ABC often identifies areas of high overhead costs per unit and so directs attention to finding ways to reduce the costs or to charge more for costly products. Activity-based costing was first clearly defined in 1987 by Robert S. Kaplan and W. Bruns as a chapter in their book Accounting and Management: A Field Study Perspective. They initially focused on manufacturing industry where increasing technology and productivity improvements have reduced the relative proportion of the direct costs of labor and materials, but have increased relative proportion of indirect costs. For example, increased automation has reduced labor, which is a direct cost, but has increased depreciation, which is an indirect cost.
(Activity Based Costing) Introduction: Activity Based costing is the method of accounting that identifies the activities that are performed by the firm and then allocate the cost on the basis of the activities performed by the firm. ABC costing system is usually used in most of the manufacturing companies as it enhances the cost classification and made the allocation of indirect easy (Heisinger, 2009). ABC Costing system is used in product costing, customer profitability analysis and target costing. This present case is about the US Bright product company which produces cakes and pastries. They use Activity Based Costing as their costing system.
We will discuss four major advantages of effective budgeting: I. Budgeting compels managers to think ahead by formalizing their responsibilities for planning. 2. Budgeting provides an opportunity of managers to reevaluate existing activities and evaluate possible new activities. 3. Budgeting aids managers in communicating objectives and coordinating actions across the organization.
The study of Drury (2004)shows that the conventional annual budgeting process is a defined and approved plan to determine the actions and activities to be carried out within a certain period of time by using a certain amount of resources to achieve the objectives given. This process deals with the projection of activities, contingencies, strategies and process interactions within the organization. The budget also controls the planning process to ensure that the organization does not deviate from financial and operating goals. These activities and processes require a thorough analysis of the organizational processes; plans for targets to be achieved by each department and by the whole organization; and expected results can be achieved and beyond. Therefore, one observe that the annual budgeting process is a complicated and boring process that requires the highest management direction and lower managerial participation.
Planning programming and budgeting, zero-based budgeting and target-based budgeting are variations of performance budgeting. These formats are projected to improve the policy decision-making situation and rational analysis. Budget officials would focus on the major policy instead of insignificant and time-consuming issues using these formats. The development PPB experienced some success and failure. It is an attempt for government to institutionalize analysis into the public budgeting process.
According to Edafalje (2011), budget represents the accounting instrument used by an organization to plan and control the operation of the organization. The budgeting process may be carried out by companies to estimate whether the company can proceed with its projected income and expenses. Holding a formal and structured budgeting process is the basis for good business management, growth and development of an organisation. Planning should be the major component of the business budgeting process to ensure the organisation achieve both short and long term goals. Research shown that good planning will typically reduce the cost of a project by about a factor of ten (10).
(2) Performance budgeting: Performance budgeting approach seeks to present a clear relationship between the input of resources and the output of services. A different focus is seen in performance budgeting models. In a strict performance budgeting environment, budgeted expenditures are based on a standard cost of inputs multiplied by the number of units of an activity to be provided in that time period. Although this strict approach may be useful for certain types of operations, many organizations require a more flexible performance approach. It is very similar to zero-base budgeting, but it does not assume that all programs must be re-justified during each budget cycle.
Process Costing helps to keep a tight reign over the monthly expenditures in a manufacturing business. As an example, Job Costing involves the costs that form salaries of labors working in a particular process whereas Process Costing involves the costs of the processed or manufactured goods undertaken by different departments. Job Costing involves the costs of every individual unit of
Under this method, all variable cost are added and included such as supplies, raw materials and shipping. The full cost of fixed overhead for the period are also included. Unlike with absorption costing these are not figured on a per-unit basis. Instead you subtract them from your revenues as a lump-sum expense. This method may provide a clearer picture of the actual incremental costs associated with a specific product.