![]() Since the data source for ABC is typically the general ledger, the only measure of resource consumption is dollars. The lack of activity dependencies significantly limits the use of ABC for effective operational and financial management. In most applications of ABC, a simple “laundry list” of activities are used which are void of their interdependent relationships. Lack of process identification and activity dependencies.Many of the advantages of ABC, over that of conventional absorption cost accounting, are offset by its disadvantages: The following represents the most significant issues related to conventional ABC. Limitations/shortcomings of conventional ABC systems. As a result, LOBs receiving the activity costs in this manner will be either over- or under-costed. The ACD rate may be comprised of a wide dispersion of costs of which the average rate often is not representative of any individual product or service. The selection of a single driver that represents the cost behavior of the activity when, in actuality, the activity may be influenced by a multitude of drivers whose costs can be defined as being fixed, variable, and semi-variable whereby ACD rates are typically treated as being 100% variable creating a linear relationship between volume and LOB activity costs.The two main issues associated with this approach are: A single principal Activity Cost Driver (ACD) is identified for each activity and an average cost per ACD is computed and used to assign activity costs to objects based on the consumption of the number of drivers by each object. The manner in which activity costs are allocated to cost objects ( e.g., LOBs, channels, customers, etc.). Since each employee represents 25% of total FTE effort, 25% of total wages ( e.g., $100,000) will be assigned to the activities performed by each employee.Īlthough total department costs can be assigned to activities, the error within each activity is quite significant and becomes more inaccurate and misleading if additional activities are performed by the department ( including shared activities among departmental employees along with cross-functional activities performed across departmental boundaries).Each employee only performs one activity.Total departmental wages are $400,000 per year.Given that the percentage of totaleffort is used to allocate resource costs to activities, perhaps a simple example will demonstrate the fallacy of this allocation method: The first source of error is the manner in which resource costs are allocated to activities. Wages coming from the GL system will be allocated to activities according to the distribution of total FTEs associated with those activities. The instructions per a major ABC software tool regarding activity costing… A commonly used resource driver is the distribution of totaleffort expressed as a percentage of time or Full-Time Equivalents (FTE). Resource costs are allocated to activities using resource drivers. However, the ABC system uses a two- stage process for allocating resource costs first to activities then, in turn, allocating activity costs to cost objects which also creates the potential for significance errors. ABC was designed to eliminate the large cost pools and unrealistic allocation methods associated with traditional costing methods. ![]() Recognizing the shortcomings of conventional absorption cost accounting, Activity-Based Costing has emerged as a tool whereby product cost distortion, as computed in conventional absorption cost accounting, was to lessened the inaccuracies of ACA. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.įor technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Redfame publishing (email available below). If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. You can help adding them by using this form. We have no bibliographic references for this item. It also allows you to accept potential citations to this item that we are uncertain about. This allows to link your profile to this item. ![]() If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. See general information about how to correct material in RePEc.įor technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact. ![]() When requesting a correction, please mention this item's handle: RePEc:rfa:afajnl:v:4:y:2018:i:2:p:55-66. You can help correct errors and omissions. ![]() All material on this site has been provided by the respective publishers and authors. ![]()
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