Talk:Activity-based costing/Archives/2014

ABC and Stock valuation
Some authors also argue that Activity Based Cost-accounting has not anything new or even any contribution to accounting in contrast to the traditional cost accounting, because these methods use same logical pattern, where in the ABC the traditional cost-drivers, such as material costs, are replaced by activities. It's not an issue whether the ABC- or the traditional cost accounting is ultimately better; it's question in which context they should be applied. For example traditional costing is better for mass manufacturing firms with relatively few final products where ABC is better for service firms.

Activity Based Costing is partly used to reduce valuation problem because resources are handled as physical units in stead of handling them in money. Dealing resources as physical units prevents among other things changes in productivity to embed in changes in prices of resources, which helps to determine overcapacity more accurately.

Im not sure I get those comments on reducing stock valuation problems. Kaplan argues that the problem with traditional costing systems is that they are geared to inventory valuation rather than providing information for managers to make decisions, ABC is well known not to be any good for inventory valuation because it encourages the incorporation of non-manufactuing overheads such as selling expenses? and traditional costing systems such AAA do use physical units? (with the exception of process costing).... And saying that traditional costing is better for manufacturing is surely plain wrong, much of the accounting world including Kaplan argued that traditional costing methods in manufacturing was a major flaw because manufacturing overheads are apportioned using meaningless methods primarily labour hours!--lincs_geezer 04:14, 6 December 2005 (UTC)

Activity based costing expansion
Outline for an expanded discussion of ABC:

1. History of management / cost accounting:

A. development of industrial corporations

B. use of direct labor as basis for cost allocation - appropriate because of cost distribution - most cost WAS direct labor

C. as non-DL cost increase in proportion, use of DL systematically distorts product costs.

D. cost accounting has been backwater for quite some time compared to financial accounting   driven by external reporting standards, i.e. GAAP and financial markets

E. Tension between financial valuation issues (inventory, cost of goods sold) and management decision making.

2. Cooper and Kaplan were key in modern rise of ABC - others?

Cooper and Kaplan are properly recognized as bringing notice to ABC, primarily through articles in Harvard Business Review. However, they are frequently and incorrectly with being the originators of ABC. Many of these concepts were in evoluntion in industry over a number of years, but CAM-I probably did more than any other person or organization to bring these concepts together into a structured approach to refined approach to the allocation of indirect costs, resulting more accurate product service costs, and the identification of underlying activity costs.

3. ABC in effect substitutes multiple cost assignment / allocation drivers in place of one and attempts to associate costs to drivers that actually bear a cause and effect relationship.

4. A cost object consumes a certain quantity of each activity / cost-driver.

5. As with anything in life there are tradeoffs:

A. ABC is significantly more complicated than traditional accounting.

B. design of system - how many drivers, which costs to include

C. use for valuation - management decision making - tradeoffs

6. ABC / bill of activities allows one to visualize a cost object in terms of the underlying process which created it. This can be useful in terms of process optimization but has its own trap in measurement. (This needs to be expanded further).

7. Use of ABC techniquies with a primary focus on process management has been described as Activity-Based Management.

8. Theory of contraints developed by Goldratt takes a different approach, simplifying cost analysis to an absolute minimum to focus on overall system performance. Use of both ABC and ToC tools can be very valuable in the appropriate context. Using either in an inappropriate context is foolish indeed.

Value Engineering and ABC?
What is the basis for asserting some special link between Value Engineering and ABC. The linkage is minimal and seems no greater than many other potential topics that relate to value, economic analysis, or process identification.

Proposed Merge with Activity based management
I have mixed feeling about a merger:

Activity Based Management - Merging Process with Measurement.
 * Activity based costing is a well known term among those trained in business schools. If we do merge, ABM should definitely be merged into ABC and not the other way around.
 * Pro: ABM is really the use of ABC, so it would fit nicely into a section. The article isn't long enough (yet) to require a separate topic
 * Con: ABC isn't the same thing as Activity based management. ABC refers to the technique of allocating costs to activity centers.  ABM refers to management's use of this cost allocation information.  That the two are the same is not at all obvious to professionals as evidenced by this article:

Egfrank 22:21, 27 March 2007 (UTC)


 * I share your mixed feelings on the topics. I'd rather see a larger article with a short section on ABM, and have the ABM article redirected here as suggested from a functional perspective.  However, this tends to limit the possible expansion of ABM - people won't feel compelled to expand a section as much as they would when they see a stub article.  One thing for sure - ABC is by far the more familiar and widely used concept, and any merger should be ABM into ABC.  Kuru  talk  01:23, 28 March 2007 (UTC)

KHenry 21 June 2007


 * I agree with your pros and cons, but I think the cons outweigh the pros. ABM is a use of ABC, but as such is a distinct entity. ABM should be expanded to include more information on using ABC from a management perspective.

History
With the advent of fully searchable Google books, I discovered this text that describes ABC published in 1919 by Robert S. Denham. The book is entirely online at http://books.google.com/books?id=iWIoAAAAYAAJ&pg=PA29&dq=cost+engineering#PPP1,M1 This deserves to be referenced as the likely origination. There are other sources by Mr. Denham. Article needs to be rewritten that CAM-I folks "rediscovered" it in the 1970s.Jkhcanoe (talk) 17:17, 12 May 2009 (UTC)