Discussion Board Activity Question Activity Based Costing in the Information Age Activity based costing systems provide a much more accurate picture of product costs than do traditional product costing systems. This exercise focuses on an article presented on the Web site of the ACA Group, an alliance of highly trained and experienced consultants and instructors. The ACA Group provides in-house training, management consulting, and systems installation. You may recognize the names of some of the Group's clients including General Motors, Nissan Motor Company, Hughes Aircraft Company, Dole Packaged Foods, Gillette, Xerox, Gateway, and Anheuser Busch. The title of the article used for this exercise is entitled 'Activity based Costing in the Information Age.' (web).
It was written by Jim Tarr, president of J. D. Tarr Associates. Mr.
Tarr has over 25 years experience in consulting, senior management, and in industrial and manufacturing engineering. You have been asked by your manager to read the article and prepare a brief for other managers in the organization. The brief must answer the following questions. 1. What are some of the advantages and disadvantages of traditional product costing systems? There are many advantages and disadvantages, in traditional product costing systems.
As, listed in Mr. Tarr! |s article you can see first that the advantages are apparent and clear. The purpose for this system is what is was intended for. And that is standard cost accounting, Companies where designed to do the following for success. 1) homogeneous products, 2) large direct costs compared to indirect costs, 3) limited ability to collect data and 4) low 'below the line' costs. (Tarr, James D.
N. d. ) So, with changing time! |s and the system being build over 70 years ago. This has been cause for change because of the disadvantages the system brings to the table due in part to the! SS advent of certified financial statements, accounting systems became more structured to comply with the demands of external stakeholders!" (Tarr, James D. N. d.
) So, the primary purpose and focus of cost accounting today is to value inventory for financial statements. The negative trend continues due in part to the floes that the 'leveraging effect' of direct labor overhead application as cause as many other applications have given cost accounting negative effects as well. 2. For what type of business case were traditional costing systems designed? Why isn't a traditional costing system appropriate for today's companies? Traditional costing systems were designed for a company with large direct costs in comparison to indirect costs, a limited ability to collect data, homogeneous products and low! SS below the line!" costs. (Tarr, James D.
N. d. ) Traditional coasting systems are not appropriate for today! |s companies because, Today! |s companies have a wide variety and complexity of products and services, high overhead costs compared to direct labor, an overabundance of data and substantial non product costs that can dramatically affect true product, distribution channel and customer profitability. (Tarr, James D. N. d.
) 3. What is activity based costing? How does this system differ from traditional costing systems? Activity based costing is defined in the following: 'A method of measuring the cost and performance of activities and cost objects. Assigns cost to activities based on their use of resources and assigns cost to cost objects based on their use of activities. ABC recognizes the causal relationship of cost drivers to activities.' f Th Peter B. B. Turney Traditional costing systems differ from activity based costing because, Traditional cost models apply resources to products in two ways.
1. Direct costs 2. Direct labor As, for Activity based coasting the! SS primary task of activity based costing is to break out indirect activities into meaningful pools which can then be assigned to processes in a manner which better reflects the way costs are actually incurred!" . (Tarr, James D. N. d.
) 4. What are some of the benefits that can be derived from even a simple activity based cost model? As, stated in Mr. Tarr! |s article. Below is what can be derived from a simple activity based on cost model.
o Improve individual product costs or costs of product families. This can lead to: "X Improved pricing strategies. "X Better and more informed product mix decisions. "X Understand how volume affects product costs. "X Limited predictive ability for the cost of future product strategies.
o Functions for which this level of analysis is less useful include: "X Identifying the cost of other types of cost objects, such as processes, services or customers. "X Attaching below the line costs to the product cost model. "X Identification of process dysfunction and process improvement. "X Benchmarking and Business Process Reengineering. (Tarr, James D.
N. d. Section C, Para. 2. ) Reference Tarr, James D. N.
d. para. 2; Section C para. 2. ! SS Activity Based Costing in the Information Age. !" The ACA Group.