Steps in the implementation of ABC
- ABC identifies hidden flaws and high-cost parts to ensure that the cost accounting system is as effective as possible. The process of building and implementing an ABC system to assist departments, which often involves interviewing the relevant departmental heads to get insight into departmental operations and the circumstances that trigger departmental activity. Subsequent analysis links these behaviors to particular items. Suppose the inventory control department is in charge of raw materials and acquired components.
- Relevant inquiries include: How many individuals work in the department?
- What are they doing? What influences the time it takes to handle an incoming shipment?
- Does it matter if the package is huge or small?
- What additional things influence your department’s workloads?
- Do you normally dispense the whole quantity of material necessary for a manufacturing run at once, or do you distribute it in smaller quantities?
- Following the interview, the system designer may utilize the number of persons participating in each activity to assign the department’s expenditures. ABC advocates for high-level costing policies, cost technologies, and activity effectiveness modules in a competitive economy to ensure survival and prosperity.
- Because allocating indirect costs to diverse goods or departments on a fair basis is a difficult task, activity-based costing allows a cost accountant to determine product costs with higher precision.
- ABC implementation involves the following stages to get the desired results:
- Identifying the functional areas (such as material management, production, and quality control) that are involved.
- Identifying the primary activities within each functional area.
- Allocating shared indirect expenses to different activities within each functional category.
- Identifying the most appropriate cost driver in each activity within functional areas to effectively allocate indirect costs and get accurate cost information. A cost driver is any aspect that affects the cost. A change in the cost driver causes a change in the overall cost of an associated cost item.
- Preparing an expense statement and comparing it to a value addition statement to determine which operations should be removed or improved for the organization’s better performance.
Functional areas may be as follows:
(a) Material Management
(b) Stores Management
(c) Production Management
(d) Quality Control Management
(e) Personnel Management
(f) Sales Management
(g) Repairs & Maintenance
(h) Administration
(i) Public Relations