New Developments in Management AccountingNovember 10, 2017
The developments will be Actively Based Costing (BBC), Throughput accounting (TA) and Just in Time (KIT). Activity Based Costing BBC is a developed costing system which focuses on the activities within the business and assigns cost objects to each activity. An activity is any form of work or task which can be related to the product. In costing, direct costs are already attributable to a Job linked to the product I. E. Materials and labor, what BBC does Is appropriate indirect costs to events or tasks as an effort to lower the risks of conventional overhead covers systems.
By doing this It allows managers to estimate the cost of individual products and services, which lets them remove unprofitable products and reduce the costs of overpriced ones. The concepts of BBC emerged in the manufacturing sector of the US during the ass’s and ass’s after coming from Japan where it was widely used in manufacturing, from then it was formalized and became a popular decision making tool for managers of that time as absorbing costs via labor was leading to poor decision making at the time.
BBC was first coined by Kaplan and Burns (1987) ho focused on Its application In the manufacturing sector (where It had been used to best effect), noting that the increase in technology that decade, had to lead to a massive hike In productivity and in turn, reducing direct labor and material costs and increasing indirect costs, bringing BBC to fruition. Once the ass’s came around, BBC started to fade away due to alternative techniques and methods, also developed by Kaplan, such as the balanced scorecard tool and economic value added.
However, today BBC Is still widely used In many sectors I. E. The service and banking sector but any theorists debate Its efficacy. The reasons behind Abs’s large success after Its initiation is due largely to it’s accurate cost measurement, as solely recovering direct costs when in reality, the indirect costs play a greater part in the production process means that tasks and Jobs were priced much more accordingly.
This meant that individual activities could be focused on specifically by managers and cost’s could be reduced where possible, the same point also meant that cost bases where much more flexible; as business satellites change, so do the costs, this allowed managers to identify how these changes affected individual activities. The ability to lower costs effectively was an invaluable tool, as the ass’s was a huge economic boom and competition was fierce, what BBC also did was directly relate the product cost to the activity (or activities) needed to produce it.
The reason BBC started to fade away slightly after the 1 ass’s was simply due to its expense. BBC is very costly to apply, It data into it as well as operate the system to get any practical function from it. That only applies to one or a small group of activities, many businesses have many activities to monitor, and suddenly BBC needs an entire team Just to get results.
The following are the steps taken to assign indirect costs to activities: Firstly the businesses activities need to be identified, as they will be your cost base, depending on the sector and the business, these will vary in scope. After that, costs can begin to be grouped together as cost pools, this stage can differ, depending on staff understanding and competency, cost drivers will vary, it’s a judgment call from many managers, which can result in differentiation from business to business.