Abc Accounting

An Analysis of Activity Based Costing

In Partial Fulfillment

Of

The Requirements

For

ACCT525

Introduction

According to Garrison, Noreen and Brewer (2010) activity based costing is defined as a costing method that is designed to provide managers with costing information for strategic and other decisions that can affect capacity and therefore fixed as well as variable costs. Activity-based costing is most always used in tandem with traditional accounting systems. Unlike traditional accounting methods, activity based costing does not conform to Generally Accepted Accounting Principles (GAAP). Activity based costing is not appropriate for every company. Often companies do not find it cost effective to use two accounting systems. Since activity based costing is used to help managers make business decisions, most of these systems are tailored to fit the companies that use them. Therefore, it can be difficult to understand and interpret the reported information. Most companies that use activity based costing use these reports internally for decision making and use traditional accounting systems to report information externally.

Activity based costing differs from traditional costing in three distinct ways. The differences are as follows: nonmanufacturing as well manufacturing costs are assigned to products only on a cause and effect basis, some manufacturing costs may be excluded from product costs and numerous overhead cost pools are used (Garrison, et al., 2010). Through the use of multiple cost drivers activity based costing considers specific activities when allocating overhead. For this reason, it can be argued that activity based costing is a more accurate and reliable decision making tool than traditional costing. Using less dependable, less specific information when deriving cost estimates can lead to inefficient operational and strategic decisions. Reliable cost management systems are important not only to managers for decision...