This is because historical cost is one that already existed and could not be amended. It is easy to be determined and can be verified. Thus, it requires less estimations of accountant to record data and easier fr auditor to inspect them subsequently. However, the historical cost accounting method faced a lot of criticism. The main reason is because it does not evaluate the current market value instead considers only the cost at the time of purchase.
The ABC method reflects a lot of accurate information for the leaders of an organization to make decisions. It can help the mangers to figure out what are the most profitable products in the company by providing the details of unnecessary costs and wasting of materials usage. It also can provide the specific information of the overhead costs based on their cost drivers for managers to make the decisions to improve their business processes and increase the overall operating efficiencies. This method can make the company keep adding value to its business process continually, as the role of the managers is maximizing the profits of the organization. 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.
First thing to achieve cost calculation according to the system was made in the U.S. Thus a system called “Activity Based Costing” has emerged. The main objectives of the ABC method are, highlighting as directly as possible the activities of the company to obtain value of the products and services. Second, analysing the activities showing the nature of activates, the place of the main causes that determine the increase of resources consumed. There are 3 cost drivers for each type of activity.
The method is used for decision making and planning in the organization and used by the managers of the organizations. Organization uses this method to have accurate costing allocation in the production. It helps to have an accurate value of cost and profitability of each products and services. This methods help to convert indirect costs into direct costs which helps to achieve an accurate costs. The method helps to support decisions related to pricing, removing or adding items from the product protfolio and implementing evaluating processes for improvemnets in the organiation.
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.
These changes may derive by reason of different settings of both economic and cultural environments. Most of the research determined on changes in management accounting practices, primarily in countries such as South Africa and Canada (for example Luther and Longden, 2001). However, Johnson and Kaplan (1987) debated that management accounting has not changed over the past years. However, Libby and Waterhouse (1996) were convinced that there were changes. Furthermore, Ittner and Larcker (2002) also expressed that management accounting practices, which consists of budgeting, performance evaluation and decision-making strategic analyses as a diversity of methods specially considered for manufacturing businesses so as to support the organisation’s infrastructure and management accounting
A logit regression model was used to check the probability that foreign subsidiaries would adopt capital budgeting strategies which are thought of as sophisticated given the firm specific and company specific factors. It is observed by the authors that capital budgeting process for the multinational enterprises involves many factors which are rarely encountered by domestic firms engaged in capital budgeting. It was determined that ownership arrangement and financial leverage were significant factors related to application of sophisticated capital budgeting techniques. Other significant points determined by the author was that the age of the firm, size of the assets and publicly traded securities were positively related to the sources used to determine discount rates. The authors suggested that more emphasis should be placed and more research should be done on the entire capital budgeting process to come up with thorough understanding on the relation among different variables and sophistication of the capital budgeting
The Activity Based Costing is a costing model developed by professors Robert Kaplan and Robin Cooper of Harvard University in late 1980's as an alternative to the traditional costing system. Traditionally, the costs were assigned based on the volume of a cost driver, such as the amount of hours needed to produce an item. But this model did not allow to precisely assigning indirect costs. Changes in the economic world had important impact on the cost structure: the shorter life cycle of the products increased the costs linked to the conception and end-of-life stages, and the new production technologies increased the costs related to services. However, the overhead part of total costs increased, between 15% and 75% in most companies using machines
Job costing involves keeping an account of direct and indirect costs. Since both types of costs are usually closely related (a job requiring high input of labor and material is likely to consume more power, machine time, supervision time, inspection time, etc.) indirect costs may be applied as an estimated fraction of direct costs. Job costing methods are similar to contract costing and batch costing methods, and are used in construction, motion picture, and shipping industries, in fabrication, repair, and maintenance works, and in services such as auditing.” (BusinessDictionary.com) Organizations incur a variety of costs in their operation. These costs are very different from one another and need to be treated differently to give an accurate picture of the
Question: 1 Activity based costing (ABC) is an accounting method which involves identifying the activities of a firm and assigning overhead cost to the products (activity based costing - ABC, 2015). This method is proven to be more accurate than traditional method which uses direct labor hours, machine hours or other volume based measures to assign indirect cost to products (Mowsen, 202). ABC costing allows companies to identify how much profit products are making and to eliminate unproductive activities. It recognizes the real cost associated with a product and thus makes it easier to fix correct price for a particular product. It helps in allocating resources to the products and services which are more profitable hence increase profitability