Losing relevance of traditional costing to ABC
The traditional activity based costing is functional for measuring a company’s progress but has some limitations. This traditional method of accounting is losing its relevance and popularity to value based management method. Where activity based accounting fails to account for difference in value from one period to the next, value based management methods avail substitute performance indicators, which enhance the company’s value (Ahmed, Zairi, & Asseri, 2006). Notably, the activity-based methods fail to compare the companies return in investments to its capital loss. This method therefore is not long-term thereby ignoring the most important fundamentals of business: its ability to make profits for a long time.
Describe the fundamentals to ABC
The activity-based activity has two steps. First, the budget of the activities is assigned to the activity centers based on the resource drivers. The elements that are associated with one activity are combined in one cost pool. These elements must have similar results. The second stage comprises of the cost earlier assigned being assigned to the products related to each activity. These costs are popularly known as cost objects (Ahmed, Zairi, & Asseri, 2006). An exclusive character of the ABC is the emphasis placed on the activities and their cost instead of the products as witnessed in the traditional costing systems.
Describe the designing of ABC model
This caption also has two stages. First, is connected to activity analysis and this is when costs are linked to activities through resource drivers. Here, the resources expected to generate capital are identified and assessed. In addition, the activity costs are calculated. The second stage involves distributing the cost of objects, which uses the activity cost drivers (Ahmed, Zairi, & Asseri, 2006). This stage is important since it is used to allocate the cost to their respective objects and this way, the goal is achieved at a reasonable cost.
Ahmed, A., Zairi, M., & Asseri, A., (2006). Performance management fundamentals