Submitted by: Submitted by woodlandgary
Views: 143
Words: 308
Pages: 2
Category: Business and Industry
Date Submitted: 10/26/2013 01:43 PM
IDEAL CANDIDATES FOR ABC SYSTEMS
Traditional (GAAP) costing methods are best suited to "situations with secure markets, large scale production with unchanging specifications, and little pressure for a highly flexible
response to changing market demands". In the absence of any need for flexibility, its simplicity and the inexpensive collection of data make traditional costing methods ideal but this setting for a management accounting system, of which the costing system is a part, is becoming less common.
For a firm to consider undertaking an ABC exercise or implementing an ABC system it
is inferred that ABC information will overcome at least some of the limitations, or fill a
void, of the existing system. Therefore, it is crucial to identify what limitations or void exists.
The intent of introducing ABC methods must be to eliminate experienced (or anticipated) problems.
Ideally traditional costing methods are used in an environment of stable markets and
standard products that are made in bulk over lengthy periods. A requirement of
flexibility in any form diminishes the relevance and reliability of information produced
by traditional costing techniques. However, in the absence of any need for flexibility,
their simplicity and the inexpensive collection of data make traditional costing methods
preferable as minimal benefits from sophisticated costing methods would not match the
higher cost.
Activity-Based Costing provides the sophistication required to accurately cost different
products made by dissimilar processes, supply useful information for operating in
highly competitive markets, and reliably cope with change.
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THE 'MEANS TEST FOR ABC:
Highly diversified product range;
Assembly and non-process industry;
Indirect costs and overheads are over 30% of total costs;
Competitors can underprice and still make profits;
Manufacturing department believes their overhead burden is too large;
Divisions believe their overhead burden is too...