The paper "Activity Based Costing" is a perfect example of finance and accounting assignment. Costing systems are information systems put in place by an organization’ s accounting department to minimize waste during production by effective monitoring of the costs incurred in the production process, (Al-Omiri & Drury, 2007). The information processed through the costing systems facilitates decision making for the management. Costing techniques, on the other hand, are the different available for the management to control cost. Several costing systems and techniques can be used to establish the cost of the company's products taking in to account all possible business functions within the company.
Such systems and techniques are activity-based costings, job costing marginal costing, parts cost, the process costing and absorption costing, (Yahya-Zadeh 2011). Activity-based costing This costing technique evaluates the true costs of a product or a service. This technique assigns manufacturing or production overheads to the products. By this, it is more logical and gives true and accurate information thereby helping the management in making decisions. ABC focuses more on activities and hence assumes that overhead costs are caused or incurred by various activities.
It also assumes that many products utilize these costs homogenously. This system recognizes the connection and relation of activates, coats and products, it is more useful and important than the traditional method of allocating costs by machine-hours, (Askarany et al, 2010). Though this costing technique is expensive to implement the long term benefits outweigh the costs of implementation. Companies especially manufacturing, process and production companies should use this technique. This is because, unlike the other techniques, it improves efficiency and helps identify activities that do not add value to the products.
It highlights activities and functions that are not performing well, the management uses this as a decision-making tool. The other costing techniques were not used because they are difficult to identify activities that cause or influence costs, they do not use cost drivers appropriately like ABC and they are not advisable to use for big manufacturing concerns. This made ABC the best option to use in this company. Process costingThis is a costing system where the organization is involved in the mass production of their products in a series of processes.
In this system, it is the process involved in cost, unlike with job costing where it is the job order that is costed or in contract costing where costs are charged to the specific contract, (Al-Omiri & Drury, 2007). In process costing the total production cost incurred in the production process are accumulated and then ascertained to their specific level of production. Use of this system in a company is effective because it is easy to allocate the expenses s to the specific process. It also enhances good management because the information on the cost of each process is available.
When a company adopts this costing system it becomes easy for the management to give tenders and their quotations. The output of one process in the costing system is often carried forward to the next system as an input, (Yahya-Zadeh 2011). This facilitates in lowering the cost of production incurred in an organization.