Running head: ACTIVITY-BASED COSTING

Activity-Based Costing

Student’s Name

Institutional Affiliation

Course

Date
ACTIVITY-BASED COSTING 2

Activity-Based Costing

Activity-based costing is a method of costing and evaluating results that entails tracking

resource usage and calculating ultimate costs. Events are allocated resources, while operations

are given cost objects. Cost drivers are used by the latter to link costs to activities to outcomes.

Kaplan and Bruns were the first to define ABC in the late 1980s. It's a contemporary take on

absorption costing, helping companies to have a better understanding of customer service and

product net value. This gives the company extra details with which to make value-based and

hence more informed choices. ABC emphasis on cost drivers which are the actions that leads to

rise in cost. Traditional cost accounting focuses on volume-related variables like hours worked,

whereas activity-based costing incorporates money transfer variables like the amount of orders

collected (Chartered Global Management Accountant, 2013). Long-term variable expenses,

which were previously regarded fixed expenses, may now be tracked back to goods in this way.

The success of a Chinese power firm, Xu Ji, is a real-life illustration of how ABC may

affect a company's success. The corporation adopted ABC to track direct expenses and variable

expenses, which were missing from standard costing methods employed by state-owned

companies. Their working procedures and processes have been effectively standardized as a

result of the ABC experience. Standardization was not a popular concept in Chinese culture, nor

was it implemented in many Chinese businesses. ABC also serves as a catalyst for Xu Ji's IT

innovations, initially in the areas of accounting and office computerization, and later in the

adoption of ERP.

Xu Ji used to use a conventional Chinese state-enterprise accounting method until the

ABC was introduced in 2001. There was a lot of manual accounting involved. Accounting was
ACTIVITY-BASED COSTING 3

primarily driven by external financial reporting standards, and product price discrepancy became

unavoidable. Following China's introduction of free market competition, Xu Ji endured a series

of flotation during this period.

ACTIVITY-BASED COSTING 4

References

Chartered Global Management Accountant. (2013, June 11th). Activity-based costing (ABC).

Retrieved January 25th, 2022, from CGMA:

https://www.cgma.org/resources/tools/essential-tools/activity-based-costing.html