Is ABC Suitable for Your Company

?
By :
Vilgia Delarhoza ( 1110534016 )
Winda Dwi Putri ( 1110534022 )
Still Remember What is ABC ?
ABC stands for Activity Based Costing

Activity-based costing (ABC) is a costing
methodology that identifies activities in an
organization and assigns the cost of each activity with
resources to all products and services according to the
actual consumption by each.

This model assigns more indirect cost (overhead)
into direct costs compared to conventional costing.
Is ABC suitable for your company ?
What is the objective way to decide ?
How To Make ABC be effective ?

A majority of all costs incurred by a
significant unit of a business must be analyzed
systematically .

Those cost is not include not only fixed
and variable factory burden costs, but also
some fixed and variable marketing and
administrative costs.

So, Managers should be assured of the
advantages before embarking on the
implemation ABC
Actually, Implementation of ABC is
requires a complex , comprehensive process
that is costly and time consuming.


Benefit of ABC
Two Dimension
Based on probability that, in
a given application, ABC will produce
costs or other result that are
significanly differenct from ones that
could be generated with more
conventional or less costly methods.
Cost information generated
by ABC indeed different ,
management will use it for
significant decisions.
Factors involved in first dimension
1. Number and diversity of product and services
produced
2. Diversity and differential degree of support
services used for different products
3. The extent to which common or joint
processes are used
4. The effectiveness of current cost allocation
methods
5. The rate of growth of period costs
Factors involved in second dimension
1. Managements freedom to set prices
2. The ratio of the period costs to total costs
3. Strategic consideration
4. Climate and culture of cost reduction in
company
5. Frequency of analysis that is desirable or
necessary
A contingency approach to
implementing ABC
Based on a companys analysis of itself.
Consist of weighting and combining the
weights of the above factors and dimension.
To start management must analyze the
nature of the company in light of
responses to two key question :
1. For a given organization, is it likely that ABC will produce
costs that are significanly different from those that are
generated with Conventional Accounting, and does it
seems likely that those costs will be better ?

1. If information that is considered better is generated by
the new system, will the new information change the
dependent decisions made by the management ?
How to find the answer ?
There are TEN MEDITIATING FACTORS can guide
management determining the answers.

Potential
advantages of ABC
VS traditional
costing methods
Managements
need and ability to
react to product
costing distortions
1. Product Diversity (PD)
Quantity or range of distinct product or the
variety of product families offered.


For example :
It is unlikely that 20cm
diameter ball bearings are a
different product offering from 21
cm diameter of ball bearing.
Differences in the complexity
of various products also should be
reflected in this analysis.

Products that appear relatively homogenous but
that vary greatly in complexity are indicative of
high diversity
There are numerous considerations in
evaluating the extent and degree of
product diversity :
1. Accounting product classification
2. Market served
3. Stockrooms
4. Sales
5. Advertising
2. Suppport Diversity ( SD )
Range or variation of support overhead given
to product. Asumption cant be based on size.
Even if the organization is only a cost center or
production facility, if it has more than one basic
product support requirements probably exist.

A superficial look at the organization may
indicate little diversity, but a closer
examination may reveal that actual activities
vary greatly by product
3. Common Process ( CP )
Degree of commonality of process among the
different product offering. Processes encompass all
identifiable activities including manufacturing,
engineering,marketing, distribution, accounting,
material handling, quality control, research and
development.
if there is a high degree of commonality of process
or activities among products, period costs required by
each product cannot be separated using conventional
management accounting.

ABC may be more EFFECTIVE
4. Period Cost Allocation ( CA )
Existing consting systems conceptual
ability to allocate period cost properly. In
essence, period cost allocation methodology
to determine if its capable of mimicking the
results of ABC.

Major focus of ABC analysis is on
associating period costs with products. ABC
also suggest that many non manufacturing
costs, such as marketing costs, also are a
function of product activity and should be
loaded in the products responsible for their
incurrance.

5. Rate of growth of period costs (PG)
Growth in period as an indicator of the
dynamism required by the costing system.

One of ABCs strength is its ability to
capture changes in the support requirements
of products quickly through its direct
measurement of activity levels.

How Does Management Use Cost
Information in Decisions?
Pricing Freedom (PF)
Pricing freedom refers to the companys
degree of power and freedom to set prices and
therefore establish product profitability.

Period Expense Ratio (FE)
Period expense ratio addresses the possible
materiality of product cost distortions directly.


Strategic Consideration (SC)
Strategic considerations refer to the constraints
imposed upon managements decisions by its explicit or
implicit strategies.

Cost Reduction (CR)
Cost reduction involves the corporate culture as
it affects the relationship between internal cost-related
decisions and the indirect component of the total cost
of product.
Analysis Frequency (AF)
Analysis frequency refers to the frequency,
either routine or special, of product cost analyses
and incorporates both the current and the desired
frequencies.