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Activity Based Costing - Term Papers

Activity Based Costing

In today's competitive economy, the cost structure is much more complex than that of the past, and there is a lot less room for error than that allowed in the more laid back economy of the past. Today's costing concerns arise from the growing disparity between direct and indirect product costs. American manufacturers have been pursuing a steady stream of manufacturing methods and technologies. The goal was simple and uniform: to reduce or eliminate direct costs. But as manufacturing has evolved, so has the structure of a product's cost. Direct costs, such as labor, are no longer the dominant cost of a product. The cost of indirect activities such as automation, marketing, sales, ...

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lead to disaster. Conventional systems report inaccurate product costs--often grossly inaccurate. Management, in turn, makes strategic decisions based on these inaccurate product costs.
Traditional cost systems assume all overhead activities are consumed equally by all products relative to volume produced. Further, all costs are allocated to products because the system assumes that current output drives current overhead costs. Overhead costs are allocated to products on the basis of the product's demand for some volume variable direct cost, usually labor hours, machine hours, or materials cost. But none of these bases individually represents the actual overhead incurred to make the product. Conventional thinking holds that the inaccuracy is not relevant because in total all costs are accounted for, and on average the relative distortion in margin reporting can not be significant.
, by contrast, identifies what activities are performed by the overhead organization and ...

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Activity Based Costing. (2008, July 30). Retrieved March 3, 2025, from http://www.essayworld.com/essays/Activity-Based-Costing/87537

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PAPER DETAILS

Added: 7/30/2008 10:15:12 AM
Category: Miscellaneous
Type: Premium Paper
Words: 820
Pages: 3

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