A cost accounting system is a process or a method used by a business to estimate the cost of their products and to determine how a firm utilizes and earns funds. It aids management in making decisions and in the planning and control of an organization. All types of businesses, whether service, manufacturing or trading, healthcare, require cost accounting to track their activities. Therefore, different firms follow different methods for verifying cost accounting. This paper focus on activity based costing (ABC) method that is used in two of the studies described in this paper and advantages and disadvantages associated with the method as well as associating accounting information to financial management for improvement of a firm.
The activity-based costing or "ABC", approach requires the organization to identify the activity, estimate the cost of the activities, assign a cost driver, collect activity data for each service, and calculate the total cost of the service by aggregating activity costs (Gapenski, 2014). It uses upstream approach for cost allocation. Therefore, ABC approach determines all activities associated with production, assigns a cost to the activities and then determines the cost of the product. Study one was conducted in Nuclear Medicine (NM) Department of a tertiary care government teaching hospital by utilizing ABC method of costing. While traditional costing allocates overhead and indirect costs in proportion to production volume or to direct costs, such costs were directly traced in ABC techniques to activities or services through tracing methods, resulting in an increase estimate of unit costs than the traditional costing technique (Hada and Chakravarty, and Mukherjee, 2014). The study identifies cost drivers and traces all costs related to various diagnostic procedures performed at the NM Centre by using ABC Costing method. The various costs calculated were traced to their respective cost drivers. Cost driver is a variable, such as activity or volume and has a cause and effect relationship between a change in level of activity or volume and a change in the level of costs and total expenses under various heads. The costs thus obtained from the study were compared at a private tertiary care hospital located in the same city and Central Government Health Scheme rates. Costing of various diagnostic procedures conducted at the NM Department in the study provided in depth knowledge of costing which can be utilized for establishing a profitable pricing policy as well as cost containment of prominent cost drivers of the hospital, thus making the hospital the best in the market. Therefore, utilizing ABC costing routinely in the NM Department provided precise costing of various diagnostic procedures and ultimately leading to cost effective measures. Study two used the Activity Based Costing which was designed to assign costs to activities that enable more accurate cost information. …show more content…
Because cost drivers relate to cost changes, measured or quantified amounts of cost drivers are excellent bases for assigning resource costs to activities and for assigning the cost of activities to cost objects. ABC is an economic model that identifies the cost pools or activity centers in an organization and assigns costs to cost drivers based on the number of each activity used. It is designed to assign current prices, direct labor hours to produce each of the items, their material costs, and annual production quantities. This study compares the data using traditional cost accounting method (TCA) and true cost calculation by activity based costing (ABC) method for automobile parts. In the case of Part 'A ' cost calculations, traditional costing accounting shows a margin of 25.41 % compared to ABC method margin to 27.49% (Kumar and Mahto, 2013). For Part 'B” TCA indicates the margin 27.5% and ABC margin to 25.14%. Part ‘C’ TCA 35.18% and ABC is 34.66% (Kumar and Mahto, 2013). Therefore, Part ‘A” showed more profit as compared to TCA cost calculation. True cost calculation by ABC method shows that the part C has the best margin but it is less than the TCA margin, which is 34.66 % (Kumar and Mahto, 2013). To conclude, activity based costing method gives the true costs of the parts compared to traditional cost accounting method. Based on both studies the advantages of using ABC costing technique are that it provides management with logical and accurate cost information which ultimately improves the efficiency and effectiveness of the activities. Activity-based costing overall can be useful
The activity-based costing or "ABC", approach requires the organization to identify the activity, estimate the cost of the activities, assign a cost driver, collect activity data for each service, and calculate the total cost of the service by aggregating activity costs (Gapenski, 2014). It uses upstream approach for cost allocation. Therefore, ABC approach determines all activities associated with production, assigns a cost to the activities and then determines the cost of the product. Study one was conducted in Nuclear Medicine (NM) Department of a tertiary care government teaching hospital by utilizing ABC method of costing. While traditional costing allocates overhead and indirect costs in proportion to production volume or to direct costs, such costs were directly traced in ABC techniques to activities or services through tracing methods, resulting in an increase estimate of unit costs than the traditional costing technique (Hada and Chakravarty, and Mukherjee, 2014). The study identifies cost drivers and traces all costs related to various diagnostic procedures performed at the NM Centre by using ABC Costing method. The various costs calculated were traced to their respective cost drivers. Cost driver is a variable, such as activity or volume and has a cause and effect relationship between a change in level of activity or volume and a change in the level of costs and total expenses under various heads. The costs thus obtained from the study were compared at a private tertiary care hospital located in the same city and Central Government Health Scheme rates. Costing of various diagnostic procedures conducted at the NM Department in the study provided in depth knowledge of costing which can be utilized for establishing a profitable pricing policy as well as cost containment of prominent cost drivers of the hospital, thus making the hospital the best in the market. Therefore, utilizing ABC costing routinely in the NM Department provided precise costing of various diagnostic procedures and ultimately leading to cost effective measures. Study two used the Activity Based Costing which was designed to assign costs to activities that enable more accurate cost information. …show more content…
Because cost drivers relate to cost changes, measured or quantified amounts of cost drivers are excellent bases for assigning resource costs to activities and for assigning the cost of activities to cost objects. ABC is an economic model that identifies the cost pools or activity centers in an organization and assigns costs to cost drivers based on the number of each activity used. It is designed to assign current prices, direct labor hours to produce each of the items, their material costs, and annual production quantities. This study compares the data using traditional cost accounting method (TCA) and true cost calculation by activity based costing (ABC) method for automobile parts. In the case of Part 'A ' cost calculations, traditional costing accounting shows a margin of 25.41 % compared to ABC method margin to 27.49% (Kumar and Mahto, 2013). For Part 'B” TCA indicates the margin 27.5% and ABC margin to 25.14%. Part ‘C’ TCA 35.18% and ABC is 34.66% (Kumar and Mahto, 2013). Therefore, Part ‘A” showed more profit as compared to TCA cost calculation. True cost calculation by ABC method shows that the part C has the best margin but it is less than the TCA margin, which is 34.66 % (Kumar and Mahto, 2013). To conclude, activity based costing method gives the true costs of the parts compared to traditional cost accounting method. Based on both studies the advantages of using ABC costing technique are that it provides management with logical and accurate cost information which ultimately improves the efficiency and effectiveness of the activities. Activity-based costing overall can be useful