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Requirement
3.3 - Discussion: Activity Based Costing
Post a 150-word summary of a current event article related to activity-based costing and aviation.
Please proofread your posting to eliminate misspelled words and insure proper sentence structure. Your posting should be readily understandable by your classmates. Please be sure to cite your reference.
3.4 - Assignment: Memorandum
The CEO of your company recently returned from a luncheon meeting where activity-based costing was presented and discussed. Though her background is not in accounting, she has worked for the company for 15 years and is thoroughly familiar with its operations. Her impression of the
presentation about ABC was that it was just another way of dividing up total overhead cost and that the total would still be the same “no matter how you sliced it.” Write a memorandum to the CEO, explaining how ABC is different from traditional volume-based costing methods. Identify the advantages and disadvantages vis-à-vis traditional methods. Your paper should be approximately one page in length. Be sure it is written to be understood by someone who is not an accountant. Please use proper sentence structure and spelling.
Solution
Activity Based Costing (ABC) in Aviation:
In the ABC costing system the cost are allocating based on activity rather than product or services. For the purpose of assigning the coat to a particular activity, cost drivers are used. In the aviation industry the rates of the travelling ticket are depend over the cost of flying. If the costs are apportioned based on activity then the cost is determined more accurately. The organisation is fixing the prices of the ticket based on the cost determined above. Due to which the organisation is achieving the competitive advantage and capable to improve business. In the Aviation industry, the activity is No. of Passenger, No. of Ticket, No. of Aircraft lifted etc. The cost drivers are Workforce Time, No. of Aircraft Scheduled, No. of Job cards etc. The correct estimation of cost is helping to compete in this dynamic environment.
The process of implementing ABC in the Aviation Industry is as follows:
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Identification of activities
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Assigning the cost to each activity
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Determine the cost driver
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Assigning of cost to the services and products based on cost drivers
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Difference between Traditional and ABC Method:
In the traditional system of assigning production overheads, overheads are first allocated and apportioned to the cost centres and then observed to cost objects. Also overheads are allocated based on Direct labor hour or Direct cost , which is not justifiable as overhead may have different spending in compare to direct labour and direct cost .Thus, ABC is improvement over the traditional costing system. Generally cost centres comprise sequence of diverse activities. If unlike products make different anxieties on those activities, the traditional costing system flops to compute the cost of productperfectly. In that circumstance, it becomes mandatory to use diverse prices for diverse activities.
Also the activity based costing helps to apportion the overhead to respective product and hence it is very helpful for the management to arrive a correct price of the product. The traditional costing system fails to allocate the overhead to different product appropriately if there are multiple overheads in manufacturing process.
Identifying the cost drivers and its respective cost is the major challenge in implementation of the ABC costing. One the cost driver is identified correctly; ABC costing can add great value in cost account management for the organisation.
Fierce competitive pressure has given rise toreductionin profit margin. ABC assists to guess cost of particular product or service more perfectly. This assists to express suitable marketing / corporate strategy and correct pricing decision..Hence we can conclude that the ABC costing system is much better as compared to the traditional costing system in the aviation industry.
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Accountingcoach.com,Activity Based Costing ,[online], Available at : http://www.accountingcoach.com/activity-based-costing/explanation , [Accessed on07 April 2016]
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Business-case-Analysis.com, What is Activity Based Costing,[Online ], Available at : http://www.accountingcoach.com/activity-based-costing/explanation , [ Accessed on 07 April 2016]
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classes.bus.oregonstate.edu/, Product Costing and Cost Allocation ,[online ], Available at : http://classes.bus.oregonstate.edu/spring-07/ba422/Management%20Accounting%20Chapter%2011.htm ,[Accessed on 07 April 2016]
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