However, a recent study by Stratton et al. (2009)
[57] showed that the use of ABC as a costing tool is still relevant among its adopters. Even managers of non ABC firms desire the implementation of ABC and consider it an ideal costing tool. He mentioned that such desirability and consideration of ABC projects an
expected increase in ABC adoption in the future too.According to Narong (2009) [58] Activity-Based Costing (ABC) is an approach that assigns costs in an objective way through the “cost and effect relationships” in which each activity cost is identified and assigned to
each product or service only if such product or service utilizes the activity. The application of ABC has lead to computing more accurate and reliable product unit costs. This motivates managers to depend on their accurate costs not only to take better short term decisions but also better long term strategic ones that affect product design and product processing activities.
Askarany et al. (2012) [59] contributed to the analysis of the factors influencing the adoption of ABC by assessing the contribution of the characteristics of an innovation on adoption. Specifically, they applies innovation diffusion theory to examine the impact of five
characteristics of an innovation, and organisation size, industry and location on the decision to adopt activitybased costing (ABC). The best model specification arises when organisations that have adopted ABC are compared with those that have rejected it. The results reveal that organisations are more likely to adopt ABC when they attach a high level of importance to the
relative advantages offered by innovations, are large.
According to Swenson & Everaert (2012) [60] the target costing emphasizes cost reduction at the product design stage of the product development cycle, before most product costs are committed or “locked in.”Their active learning simulation demonstrates how
a management theory is relevant to a business improvement initiative (target costing). As a part of the target costing simulation, student participants work in teams to address a business issue that cuts across functional boundaries. In addition to the accounting function, a target costing initiative requires participation from sales, marketing, and design engineering.
Therefore, the simulation begins with the students learning how to build and develop an activity-based product cost for a model truck. In his study the some students are divided into teams and are instructed to reduce the truck’s cost through a re-design exercise, subject to certain customer requirements and quality constraints. Half of the teams are assigned a specific cost reduction target, and the other half instructed to reduce costs “as much as possible.” Students then strive to reduce the cost of the truck’s design by eliminating unnecessary parts, by using less expensive parts, and by using less part variety. As the student
teams evaluate potential new designs, they actually use detailed activity cost information from the product costing system to guide their design decisions.
IV. Discussion
From the review of literatures it is evident that ABC can be used every type of organization; be it a industry, finance, institution or service sector. The salient findings from the survey, the following inferences as a point of discussion can be made:
• Activity Based Costing (ABC) provides more accurate cost data as compared to traditional
based costing system. So provide detailed information on the value-added and non-value-added activities performed by the organization.
• Traditional costing system has led to strategic failures in many organizations when various costs especially the overheads, are incorrectly allocated to product lines.
• Costing method can be applied where the need for precise cost estimating information increases continuously.
• Activity-Based Costing approach may complement a customer relationship management effort. The principle of activity-based costing reflect the performance of the company, thus enable to do cost effective business with competitors. In other words, it works as a yardstick of benchmark business performance.
• Applying this model helps managers understand the true costs of providing products and services, and the factors that drive these costs, while addressing other concerns such as customer satisfaction.
• The implementation of ABC is not only in the condition of manufacturing corporations, distribution centres, agriculture, but also in the field of services, especially in the hospitality.
• By using TD-ABC system, in comparison existing method provides more data on cost and profitability of customers served. The managers of small service businesses can make use of time equations in TDABC to calculate necessary time for activities engaged in delivering a unit of service. The recommendation is that small service businesses should implement TD-ABC to enhance their cost accumulation process and pricing of services, hence increase their profitability.
• Preferring activity based budgeting rather than the classical (volume-based) one will increase the probability of success of target costing practices.
• Three accounting systems: Activity based costing, Time-Driven Activity Based costing and Lean Accounting. Comparisons are made based on the three basic roles of information generated by accounting systems: financial reporting, decision making, and operational control and improvement.
• Cost allocation methodology is performed within separate stages of implementation. The major part is to explaining the methodological steps within ABC implantation, which include a feasibility study and review, activity and cost object definition, assigning costs to activities, defining the appropriate cost drivers for individual activities, determining the output measures for individual activities, calculating the primary rates of individual activities, assigning the costs of support activities to primary activities, and calculating the costs of defined cost objects.
• An effectively implemented Activity-Based Costing system provides accurate product costing and proves a useful aid for managing business operations.
• Porter model delineated into primary activities that add value to the product from a customer point of view, and support or secondary activities, which ensure the efficient performance of the primary activities.
• Activity-based costing (ABC) can significantly contribute to global supply chain management (SCM) as it providing more accurate, detailed and up-to-date information on all activities and processes in organisations.
• To improve SCM and organisations’ performance by increasing the adoption of ABC in organisations, one of the main implications of the findings is that the adoption of ABC in smaller firms needs more attention compared with the larger firms regardless of their industries (manufacturing versus nonmanufacturingfirms). However, when the decision is
made to implement ABC, non-manufacturing firms (rather than manufacturing firms) need more attention to proceed with a higher level of adoption of ABC.
• The ultimate reason for firms to adopt Activity-Based Costing and Management (ABC/M) is to improve their financial performance by managing their cost in such a manner that they control them and thus can reduce them.
V. Conclusion
This paper revealed that the model of activity based costing can be used in every type of
organization. It has been successfully implemented and used by many large companies like industries, institutions, or public sector. Based on the literature survey we found that:
• The activity-based costing implementation revealed numerous organizational changes, which resulted from the process of implementation, such as closer connection between management accounting and other operational functions. ABC and any other costing system are not static; it can be established,therefore, like organizations change and business conditions, ABC needs to be updated and maintained. Finally, in transferring its clear picture,ABC has ability to make champions of individuals of specific goods or services.
• Activity-Based Management methods have a broad range of uses, permitting the empowering utilization of ABC information for a wide variety of company functions and operations such as process analysis, strategy support and time-based accounting,monitoring wastage, as well as quality and productivity management.
• ABC provides information for strategic decisions,such as product mix and sourcing decisions that is consistent with the long-run nature of these decisions.
• ABC allows product designers to understand the impact of different designs on cost and flexibility and modify their designs accordingly.
• ABC supports the continuous improvement process by allowing management to gain new insights into activity performance, by focusing attention on the sources of demand for activities and by permitting management to create a behavioral incentive to improve one or more aspects of manufacturing.
• ABC is a tool for managing complexity in manufacturing. ABC provides activity-based information to help managers understand and eliminate complexity. It is also a communication tool between production and marketing and product design that helps minimize product changes which create unnecessary complexity.
• The ABC designer can use the rules of ABC design to simplify the system without sacrificing the accuracy of product cost. A well designed ABC system will also have no more detail than that required by the manufacturing environment.