Please, write a main discussion post about the below topic and respond to the 2 classmate discussion posts attached. Thanks
Topic:
"Activity-based costing is the wave of the present and the future. All companies should adopt it." Do you agree? Explain.
Instructions for main post (Around 200 words) Please, write a main discussion post about the below topic: Topic: "Activity-based costing is the wave of the present and the future. All companies should adopt it." Do you agree? Explain. (Citations only needed for main post) Instructions for the two classmate responses (around 150 words each) Please, respond to the below two classmate main posts. (Please, the responses need to be a discussion, not an evaluation. You can agree with them and add/comment about their response.) Thank you Classmate post #1: Cheyenne Haley Many large companies, particularly in the manufacturing sector, use activity-based costing to help the business accurately price their offerings (Blakely-Gray, 2018). Activity-based costing system is a method of accounting that can be used to find the total cost of activities necessary to make a product. Activity based costing (ABC) assigns manufacturing overhead costs to products in a more logical manner that assign the products that are the real cause of the overhead that are demanding the activities (Averkamp, n.d.). Using the ABC system will help companies take into consideration both direct and overhead costs of creating each product. The ABC system will help a company recognize that different products require difference indirect expenses. This will allow businesses to accurately set prices for products as well as showing which overhead costs the company might be able to cut back on to save money. ABC helps companies identify specific products that are unprofitable, improve production process efficiency, price products appropriately, and reveal any unnecessary costs that become targets for elimination (Woodruff, 2019). Before a company can adopt the ABC system approach, the company will need to understand the process for assigning costs to activities. The first step is to identify which activities are necessary to create the product. Next, each activity will need to be separated into its own cost pool, which will be in a group of individual costs associated with an activity. This will help determine the total overhead of each cost pool. Then, the company must assign activity cost drivers to each cost pool. After the company divides the total overhead in each cost pool by the total cost drivers to get the cost driver rates, then the company will compute how many hours, parts, etc. the activity used and multiply it by the cost driver. Deciding between traditional cost accounting or ABC cost accounting has its own lists of pros and cons. Traditional costs can sometimes hide or distort information on the costs of individual products and services. By adopting the ABC system approach, it will help a business’s make good overhead decisions and help with pricing products. Additionally, ABC helps companies understand the “true costs” of products and services more accurately. I think that it all depends the type of company you have, to determine on whether to choose the ABC method or the more traditional method. ABC is more for larger companies but can work just as well for smaller companies. I do not necessarily think that all companies should adopt the ABC method, it just depends on the company. Classmate post # 2: Kari Grippo I agree with the statement that “activity-based costing is the wave of the present and the future,” however, I do not completely agree with the second statement made. To say that “all” companies should adopt activity-based costing is somewhat of generalization as this statement does not account for the diverse nature of business conducted by companies within different industries and market segments. Construction companies as well as health care organizations fit the parameters for using ABC systems, however, smaller business organizations such as local coffee shops, for example, may operate better under a traditional costing system. The statement that all companies should adopt activity-based costing is false since managers must choose the level of detail to use within a costing system through evaluating the expected costs and benefits which result from better decisions (Datar & Rajan 2019, p. 222). In this evaluation, the manager may determine that, based on the nature of the business of their firm and its production, activity-based costing may not be the most appropriate mechanism to implement for a costing system. There are many advantages for firms choosing to implement activity-based costing systems but there are also several disadvantages and limitations that are presented with this costing method. An ABC system is most likely to provide the best benefits when “significant amounts of indirect costs are allocated using only one or two cost pools” (Datar & Rajan 2019, p. 222). An ABC system is also most appropriate when all or most of the indirect costs are identified as “output unit-level costs” (Datar & Rajan 2019, p. 222). Firms who make products based on various demands of resources due to differences in volume, process steps, batch size, or complexity may also derive the most benefits from an ABC system. Products that a company is “well-suited” to make and sell that show small products, while products that a company is not as suited to make show smaller profits may indicate a need for the use of an ABC system. Another instance in which ABC systems would work best would be in the case where the operations staff has “substantial disagreement with the reported costs of manufacturing and marketing products and services” (Datar & Rajan 2019, p. 222). The advantages of choosing an ABC system for your company (should it be the most appropriate option) include the following: an ABC system “provides realistic costs of manufacturing for specific products, allocates manufacturing overhead more accurately to products and processes that use the activity, identifies inefficiencies and targets for improvements, determines product profit margins more precisely, discovers which processes have unnecessary and wasted costs, and offers better understanding and justification of costs in manufacturing overhead” (Woodruff, 2019). There are several limitations and disadvantages of an ABC system, however, which prove to invalidate the statement that “all” companies should use an ABC system. Implementing an ABC system is a major project that will require substantial resources and, one implemented, it is costly to maintain. With this being said, smaller companies which do not have the resources or means to actually implement ABC should choose another method. Another limitation of ABC is that it produces numbers like product margins which are odds with the numbers that are produced with traditional costing systems (Accounting Explanation, 2011). Data derived from ABC can also be easily misinterpreted and must be utilized with caution when making decisions. The costs assigned to products, customers, and other cost objects are only “potentially relevant” (Accounting Explanation, 2011). Because of this, managers must make identify which costs are really relevant for the current decisions. ABC may actually not be as useful for companies where overhead is small in proportion to the total operating costs in place (Woodruff, 2019). Another limitation of ABC is that the reports generated under this system do not conform to GAAP. Due to this, an organization which is involved in ABC should really have 2 cost systems in place – one for internal use and then one for preparing the external reports.