StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Activity Based Costing and Economic Value Added Measure - Essay Example

Cite this document
Summary
From the paper "Activity-Based Costing and Economic Value Added Measure", the concept of Activity-based costing hinges on the apportionment of cost lay emphasis on the apportionment of the direct costs as far as practicable to the concerned activities without leaving room for estimation…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER95.6% of users find it useful
Activity Based Costing and Economic Value Added Measure
Read Text Preview

Extract of sample "Activity Based Costing and Economic Value Added Measure"

?Activity Based Costing & Economic Value Added Measure and their impact on Process Improvement & Business Profitability Introduction The concept of Activity based costing hinges on allocation or apportionment of cost lay emphasize on allocation or apportionment of the direct costs as far as practicable to the concerned activities without leaving a room for estimation. The consumption based approach in this process lends interplay of the scientific approach to the process strictly on the basis of cause-and-effect relationship to the processes, rather than ’ guestimation’ (guess and estimation) in the process of allocation and apportionment, with the underlining principle of ‘traceability’. Though ‘True Cost’ in any situation is fraught with so many uncertainties, by and large the efforts made in its ascertainment paved way for efficient and alternative management practices with improved results. An introspective analysis might reveal that no Value Added Measure circumventing this basic philosophy can make a headway in process improvement or business profitability, for the simple reason that all the value added measures hinges primarily on productivity, which could be addressed properly only through revisit of the approaches to the ‘value’, which predominantly depends on reasonably accurate calculation of the cost of production. Economic Value Added Measures Economic value addition (EVA) is generally discussed with reference to the financial performance, and acts as a complementary tool in the measurement of the performance in a broader perspective, keeping in line with the expectations of the stakeholders, where the finer details of the cost is not perceived as important as in the case of management practices of ABC. It has been stated, “in addition to traditional accounting measures of business performance, a new model of measuring business performance has been developed, its name being - economic value added (EVA)...it is a simple analysis which directs towards the factors of value;” (Ilic, 2010, p. 94). The concept of EVA is mainly related to capital investments and based on the difference between net profit and the cost of capital and the ways and means to tilt the scale in favor of an enterprise. Therefore, for efficiency in the operations, EVA needs to be integrated with ABC in the long run, because the later is related to the factors not directly related to ‘cost’ but scores of other factors such as alternative investments, competition, government policies and international events, which nevertheless influences cost. Cost Management Cost management is the basic underlying factor for the success of a business. Hilton, Maher & Selto (2008, p. 5) states, “Cost management is important to organizations because it is more than measuring and reporting costs that have occurred. Cost management is focused on the future impacts of current or proposed decisions. Cost management is a philosophy, an attitude, and a set of techniques to create more value at lower cost”. Computation of direct (or variable cost) of material or labor is relatively simpler. But, in the modern business enterprises and in the society, the increase in the proportion of other costs over the period of time which hitherto have been considered as fixed and uncontrollable assumed significance, since the controllability of such costs could not be overlooked in a competitive environment. Vazakidis, Karagiannis & Tsialta (2010, p. 382) state, “The use of this method [ABC] with the cooperation of new technologies and new methods of management, can resolve all the deficiencies of Public Sector, so as citizens and companies will be better served”. Fundamentals of Activity Based Costing Hilton, Maher & Stelto (2008, p 148) state that “Studies of company practices indicate that a large number of companies, as well as some organizations in the public sector, are using ABC. Some companies have tried ABC and dropped it. Reasons for this include its implementation cost. In the case of Hewlett-Packard division that one of the authors studied, management obtained a great deal of information from ABC, restructured activities as a result, and no longer had the problems that ABC had uncovered. ABC had served its purpose and was no longer needed.” Categorization of the indirect costs is the greatest challenge which could vitiate the cost estimation process. It is very important to identify each cost with reference a particular activity or apportion the common cost to the related activities on a scientific basis. Hilton, Maher & Stelto (2008, p. 147) state, “Categorize indirect costs, which are not easily traced to the product, into cost pools. Cost pools are groups of individual cost items; costs with similar cost drivers or allocation bases are grouped together. Ideally, we match costs with allocation bases or cost drivers that have a cause-and-effect relationship with the cost”. Cost-driver bases could be number of clients, orders, units produced, machine hours and so on. The cost- driver rate for each cost-driver base forms the basis for computation of cost, and the apportionment of cost done on this basis establishes greater functional relationship of cost with the production or service activities as against batch level or product level apportionment of cost for example, adopted in the traditional costing system. Unused manufacturing capacity costs are excluded and also the unit level, batch level, product level and customer level activities, segregated in ABC, reflecting traceability of incidence of cost with reference to products or services in computing the cost of production. Hilton, Maher & Stelto (2008, p. 163) state that in the implementation of ABC, the organizations must follow four steps, viz. Step 1: Identify and classify activities related to products, Step 2: Estimate the Cost of activities identified in step 1, Step 3: Calculate a cost-driver rate for each activity and Step 4 Assign activity costs to products. Costs related to product level activities in this system are directly attributable to particular product, which otherwise might be indirectly related to a manufacturing unit which produces several products. Impact on Process Improvement The justification for ABC lies in the fact of its usefulness in realistic and logical methods in computation of cost. However, the ‘value’ from the customers’ point of view is not related to cost per se; it is also related to their expectation, satisfaction and perception, and involves other factors outside the purview of cost. Borysowich (2007) states “The transport of the product, within a business process, adds nothing to the product in the customer's view and is not necessary to support the business process.  The movement of work-in-progress is probably due to inefficient process design.  The goal in designing the process is to minimize the amount of movement required in the process”. Profitability in business Identifying inefficiencies in the processes for taking remedial measures to rectify the position and control of cost at all levels are the guiding principles in making the business profitable. All the production activities are directed to contribute to the value of the products or services. The value-add activities are inter alia concerned with the design of the products and the processes, packaging and advertisements with a view to satisfying the customer's expectations which might be guided by the changing tastes and fashions or other intangible factors. Therefore, integration of ABC & EVA under these circumstances is called for the objective of maximization of profits. Conclusion The scope of Activity Based Costing and EVA are not contradictory to each other, rather complementary to each other in achieving the corporate objectives and profitability. The integration of Activity-Based Costing (ABC) and Economic Value Added (EVA) has resulted into an integrated system of ABC & EVA. Hu (2010, p. 141) state that the integrated management mode of ABC & EVA has the advantages of ABC and EVA, and the introduction of EVA could improve the deficiency that ABC could not completely reflect the capital cost, and it is very important for the management of the enterprise. In this method, distribution of cost and capital in an enterprise would be taken into account for the growth and development of the business. References Borysowich, C. (2007) Observations from a Tech Architect: Enterprise Implementation Issues & Solutions, 21 November 2007, Toolbox.com, http://it.toolbox.com/blogs/enterprise-solutions/determining-the-valueadded-activities-of-a-process-20700 Hilton, R., Maher, M. & Selto, F. (2008) Cost Management: Strategies for Business Decisions, McGraw-Hill Higher Education, 4th Ed. HU, H. (2010) Primary Research of the Advantages and the Cost Control of the ABC & EVA Integrated System, International Business Research Vol. 3, No. 3; July 2010, pp. 141-143. DOAJ - Directory of Open Access Journals, http://www.doaj.org/doaj?func=searchArticles&q1=Activity+based+costing&f1=all&b1=and&q2=&f2=all Ilic, M. (2008) Economic value added as a modern performance indicator, Perspectives of Innovations, Economics & Business, Volume 6, Issue 3, 2010, pp. 94-97., DOAJ - Directory of Open Access Journals, http://www.doaj.org/doaj?func=searchArticles&q1=Economic+value+added&f1=all&b1=and&q2=&f2=all Vazakidis, A., Karagiannis, I. & Tsialta, A. (2010) Activity-Based Costing in the Public Sector, Journal of Social Sciences 6 (3): 376-382, 2010, ISSN 1549-3652, DOAJ - Directory of Open Access Journals, http://www.doaj.org/doaj?func=searchArticles&q1=Activity+based+costing&f1=all&b1=and&q2=&f2=all Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“The effect of Value-Added Activity Based Costing and Economic Value Essay”, n.d.)
Retrieved from https://studentshare.org/environmental-studies/1409604-the-effect-of-value-added-activity-based-costing
(The Effect of Value-Added Activity Based Costing and Economic Value Essay)
https://studentshare.org/environmental-studies/1409604-the-effect-of-value-added-activity-based-costing.
“The Effect of Value-Added Activity Based Costing and Economic Value Essay”, n.d. https://studentshare.org/environmental-studies/1409604-the-effect-of-value-added-activity-based-costing.
  • Cited: 0 times

CHECK THESE SAMPLES OF Activity Based Costing and Economic Value Added Measure

Accounting for Management Decisions

activity based costing, value chain analysis, and customer profitability are the three major frameworks that assist an organisation to evaluate its business flow.... ?? Cost centre and cost driver are two core concepts of activity based costing ... activity based costing activity based costing (ABC) can be simply referred to a special costing approach that clearly identifies and defines activities in an organisation and allocates costs of each activity among all products and services based on actual consumption by each activity....
17 Pages (4250 words) Research Paper

Financial Performance: the Activity Based Costing

Here an example is given to know the difference about the activity based costing and conventional costing.... But before stating it, we need to critically analyze the financial performances reports and compare the financial performance of activity based costing and conventional costing methods.... Accounting Dissertation Does the activity based costing play a vital part in financial performance?... Introduction: activity based costing is the assigning of expenses of the measures which is the actual causes of expenses....
17 Pages (4250 words) Essay

Activity Based Costing

activity based costing (ABC) is a method for developing cost estimates in which the project is subdivided into discrete, quantifiable activities or a work unit” (Doe.... activity based costing (ABC) is a common procedure normally most of the organizations adopted to determine the price of their products or services.... But it is not necessarily that every time the ABC method will bring the positive results alone or in other words the success rate of activity based costing may not be 100% all the time....
10 Pages (2500 words) Essay

The Internal and External Communications and Monitoring the Organizational Performance

A competitive advantage is an advantage over competitors gained by offering consumers greater value, either using lower prices or by providing greater benefits and service that justifies higher prices.... The paper "The Internal and External Communications and Monitoring the Organizational Performance" highlights the strategic goals of the organization....
10 Pages (2500 words) Essay

Critical analysis of activity based costing and traditional costing system

In the efforts to implement the Strategic Management Accounting approach in organizations,modern business enterprises find Activity-based costing as an improved costing system by which the problem of large number of indirect costs and their allocation problem can be overcome.... ...
11 Pages (2750 words) Assignment

True Cost of King Plc

Other methods of appraisal are also reviewed to determine the appropriateness of measure for King Plc.... Admittedly, the financial and management accountants view costing methods of King PLC differently.... Reportedly, the first one uses the traditional costing system that values inventory for financial statement purposes while the latter sees cost accounting as a basis for the decision and internal information.... Based on the information provided, the study analyzes the traditional costing method used for financial accounting and the direct costing approach recommended in management accounting....
11 Pages (2750 words) Research Paper

Managerial Accounting: Value Chain Analysis

Techniques like activity based costing (ABC), Balanced Score Card, Value chain and Profitability measurements have been discussed to look into every aspect.... Activity Based CostingActivity based costing identifies the cost pools or the activity centers within the organization and allocates cost to the activities using the multiple cost drivers (Akyol, Tuncel & Bayhan, 2005).... This report 'Managerial Accounting: value Chain Analysis' aims to provide an insight into the managerial accounting system....
10 Pages (2500 words) Dissertation

Activity-Based Costing for Montclair Paper Company

The paper 'Activity-based costing for Montclair Paper Company' is a fascinating example of a finance & accounting case study.... The paper presents the analysis and discussion of the significance of implementing an activity-based costing system in the organization.... The paper 'Activity-based costing for Montclair Paper Company' is a fascinating example of a finance & accounting case study.... The paper presents the analysis and discussion of the significance of implementing an activity-based costing system in the organization....
6 Pages (1500 words) Case Study
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us