This action might not be possible to undo. Are you sure you want to continue?
Essay By Joseph Cesar Fourth Year Advance Diploma in Hospitality Management Management Accounting Module Commissioned by Miss Marie Harnett (Lecturer)
Variable costs are very easy to identify as they are directly proportionate to cost objects. During the past. 394). “all products/service must be priced so as to fully recover all the costs incurred in making and rendering them respectively. These indirect costs should be recovered so that they can be added to the total costs of products/services. 394) reflected that. An example of the method’s introduction into a hospitality organisation is examined. thus invincible. 2 . In this essay. “New methods of allocating cost were necessary. The basis of cost absorption is “the process of recording. Jones (2008. when manufacturing organizations were the dominating industry. classifying. It is very difficult to identify these wastes if careful analysis of the various costs involve is not done. therefore they became irrelevant. However. making the prices realistic and profitable. The latter uses very little direct labour and machines. Its advantages and disadvantages are also discussed. Eventually.” Therefore both direct and indirect costs that are affiliated to products must be recovered and absorbed in their prices. this process was introduced to recover costs and it assumed that overhead costs were relatively small because products were made intensively using machines and direct labour. 407). The stimulus to find these new methods led to the development of activity-based costing (ABC) which seeks to establish activities as a basis for allocating overheads” Jones (2008. thus overheads were absorbed using those measures. costs affiliated with overheads are indirectly affiliated to products. allocating the costs.In the financial operations of every organization. manufacturing industry became less active by the rise of service and/or knowledge-based industries. and then absorbing these costs into individual product/service” Jones (2008. the development of ABC as a management accounting technique and its utilisation are detailed. substantial amount of wastes are generated resulting from transactions and/or projects.
parts. This is based on the activities that a product drawn up. 68). purchase orders. set-up. set-ups. ABC is defined as “the collection of financial and operation performance tracing the significant activities of the firm-to-product cost” Jong No & Kleiner (1997a. and developed to help financial management understand and control indirect costs. (1990a). The key factors of ABC are activities and their cost drivers. etc. ABC has been around since the mid-eighties. machine hours or material costs consumed in making the product.The traditional cost accounting method focuses only on measuring units of particular products assuming that each unit consume resources such as the number of direct labour hours. An activity is a particular operation in the production cycle and/or the entire material acquisition process. 3 . ABC uses cost drivers to locate costs. maintenance hours and machine hours. material handling and supervision. power. They further states that ABC acknowledges that products and services use up activities rather than direct use of resources. inspections. It was initiated in that time by two associate professors of control at the Harvard University. Costs are traced from activities to products based on each product’s consumption of the activities performed” Cooper. 68). Examples of cost drivers are set-up hours. “The ABC system focus on the activities performed to produce products. What causes activities to happen is called cost driver. cited in Jong No and Kleiner (1997. 1) wrote that ABC emerged in response to competitive pressures that exposed inaccuracies and distortions in the earlier cost accounting analysis. Turney (2008. Activities use resources such as support labour.
The third step is to identify activity centres. For example as used by Jong No & Kleiner (1997). The second stage is to trace the costs into selected drivers in each activity. The resources that each activity consumes can be reported separately or collectively with other activities in its group. The first step is to group all actions into activities as a whole. 70) mention that it is economically unfeasible to use a different cost driver for each action because of the vast number of actions. they can be grouped into receiving and manufacturing centres. The second step is how to report the cost of activities. According to Jong No & Kleiner (1997). This is simply grouping activities into activity centre within the production process. For example. where the system might report set-up costs for a product which include material movement in the amount. first and second stage driver selections. the first stage is to trace the cost of input into activities in each centre. where different measures of resource consumption can be used. Jong No & Kleiner (1997. 4 . The information about the consumption of resources at the activity centre level is often superior to that of the product level. The fourth and fifth steps are correlated. or the system might break the cost down and report separately the amount for set-up from the amount for material movement.There are five steps in the design of an ABC system with the objective of getting more benefits possible at the lowest total cost. A driver is then use to locate the costs of activities to products.
Cooper (1991a. As for all scientific functions. Cited in Jong No & Kleiner. there are ways and processes of going about those functions. Second is to form and educate an implementation team within the organization. The technical accounting of ABC is thus outlined. But ABC has emerged as a tremendously useful guide to management action that can translate directly into higher profits” Cooper & Kaplan (1991. Third is to design and gather relevant data. Finally an analysis of the activity-based product costs is done and finding ways to change operations for reducing costs Jong No & Kleiner (1997. “Initially. managers viewed the ABC approach as a more accurate way of calculating product costs. Organization needs to bring in technicians who understand and who can implement this method. first is to conduct a seminar on-site where an introduction to the concepts and benefits of ABC is given to the management team. thus ensuring higher profits. 71). The fifth phase is to conduct an executive seminar to the top management so that more commitment will be generated towards ABC system. then overhead is examined to identify the cost drivers. Direct costs are analysed. Sixth is to explain the results so that they can understand how the system differs from the existing one. 71-72). These are the processing steps: 5 . Fourth is to report to executives on the progress and findings.The implementation of ABC must be structured sensitively to “determine the actual design of the system and how well it will be accepted by staff. 130). It has seven phases. The implementation plan is to ensure the success of ABC. It is also one reason why the adoption of ABC is costly. 1997.
Identifies cost drivers and allocate appropriate overheads to them 5. is a powerful tool for decision making”(http://www. and value streams. Not all managers understands ABC’s concept and nor can they use it. It makes visible waste and non-value added activities. It portrays how work is done. thus not utilizing it effectively to changes occurred by a decision at hand. and understand profitability of products and customers and therefore.Record all the costs (direct and indirect) 2. ABC has its limitations and advantages. 4. ABC is a virtual analysis that is not conforming to the conventional accounting principles. It supports performance management and scorecards. 3. It is easier to understand by everyone. It utilizes unit cost rather than just total cost.1.accounting_for_management. Managers can misinterpret the costing data. Antos (2011) 6 . “It gives a more accurate costing of products/services and other cost pools. Therefore it is not always reported strategically as required. ABC help managers manage overheads. It generates a better understanding of overheads. It is costly and requires cognitive approach by a rare segment that can understands it and who are capable of implementing it effectively and efficiently.Calculate activity-cost driver rates 6. supply chains. It can be used to benchmark the organization performance.Absorb both direct and indirect costs into a product or service An example of the whole process can be seen in the Appendix 1 Like everything else. ABC integrates well with continuous improvement programs like Six Sigma.Identifies activities that determine overhead costs. ABC has its advantages and disadvantages.Categories and group those cost before allocating them to departments. It enables costing processes.com/ 2011) However.
casino revenues fell and food prices and labour cost increased. implement and maintain. 1033). They applied the five steps of designing ABC. and that it makes waste visible which some executives and managers don’t want their boss to see.. waste and inefficient operations. with the objective of establishing an ABC of each item produced in the bakery and to determine if ABC can be used to eliminate monthly allocations for all production kitchens. It was discovered that only 33.3% were value-added and 66. that it is costly to buy. (2010.7% were non-value added to products. They conducted this research in a support kitchen. Yet it was designed to produce for eleven properties. although this can be perceive as an advantage. Supervision was the activity consuming the greatest portion rate at 77%. During the time of global economic recession. Increased training to develop more autonomy was the alternative. The bakery is among five others which provide fresh baked bread to fifteen revenue producing outlets and five other sister properties. limiting overtime and lessening part-time workers were the alternatives. From gathering relevant data to finally conducting an ABC menu engineering (ABC ME) analysis to determine if allocations could be eliminated and to establish if some outlets would be affected by the change. thus if only one delivery could be done. Vaughn et al.added that ABC consumes a lot of time to collect data. An example of how ABC was introduced in the hospitality industry is outlined. expense would be 7 . The application of ABC was to a support kitchen (bakery) in a Las Vegas casino. One casino in Las Vegas motivated the F&B departments to increase productivity and to reduce costs. As the bakery was labour intensive. Delivery cost was also significant.
The ABC ME also identified a lot of unprofitable items. Since the labour cost pool was large. As a result. The decline of ABC was due to “over enthusiasm. limits to the method and supporting systems. Vaughn et al. the ABC has a life cycle. 3). 1987-1991 was described as the “a bubble of enthusiasm for a new technology” Turney (2008. the data were summarized and managerial implications were discussed. (2010) concluded that. 4). ‘Trough of Disillusionment’ phase was in the period 1991-1995. The ABC also identified a low allocation of cost on pizza dough because the traditional allocation was based on the food cost of bread ordered. which accomplished the main purpose of this study. 2) observed that. it could be successfully traced to individual products.” Like all technologies. One significant discovery here was the recognition the ABC “could revealed the sources of loss that were responsible for the decline in profitability” Turney (2008. Turney (2008. confusion. ‘The Peak of Inflated Expectations’ was due to massive publicity of ABC. sustainability difficulties. and lowered expectations. “ABC has achieved two milestones like other mature and successful technologies. This approach then allowed the casino to eliminate traditional monthly allocation methods based on food cost.lowered. “the ABC concept allows management to draw some useful implications for costing and pricing of its bakery products. Another reason was that managers were 8 . which resulted in an effective ABC application.” During 1984-1987 it was the ‘Technology Trigger’ phase bringing innovations into cost accounting due to the decrease in manufacturing industries and as a result of the “Japanese Competition” which drove western companies to develop new costing methods that eventually triggered professors Cooper and Kaplan to develop the ABC method.. The ABC analysis of the cost of delivering bread to restaurants showed that some outlets were underpaying while others were overpaying.
New evidence of its benefits." ABC allows managers to better appreciate accountings and it enlightened them to build interests and enthusiasm in the financial aspects of their organizations. sales. logistics. At this stage it was clear that ABC has reached its ‘Plateau of Productivity’ (2000-2006). lead. limiting or increasing future budgets. Today ABC is designed to measure performance and to guide on improving profitability. supply chain. But ABC continues to progress through learning from errors. organize. banking. It developed from cost accounting systems into other areas such as administration. 9 . new generation of ABC methods and software. Turney (2008. 1) describes it as a “value adder to performance management systems.jumping attention to new management methods. It is also into eco-friendly practices. ABC helps in forecasting. use of internet and business intelligence (BI) systems to report ABC data were a few factors that triggered increase interest in ABC. and control human resources more profitably. etc. healthcare. It has now developed into Activity-Based Management. It is the result of many years of development and learning. research and development. It increased its market penetration and development. marketing. The technology is helping managers to better plan. Its benefits were recognized. packaged goods. During 1995-2000 it was ‘Climbing the Slope of Enlightenment’. energy. insurance.
68-72.com/limitations_of_actvity_based_costing.H. not an option”..accountingformanagement. 86-8. September. (2011). J.. Cited in: Jong No. R. Cooper.References Anon.htm [Accessed 19th May 2011].. May-June 1991. R. How to implement activity-based costing: Journal of Logistic Information Management 10(2). B. Advantages. M. pp. Harvard Business Review.. J. Accountancy (UK). (1991) Profit Priorities from Activity-Based Costing. 10 .]. Jones. “ABC: A need. & Kaplan.. (2008) Accounting [2nd ed. 68-72. Disadvantages and Limitations of Activity-Based Costing (ABC) System.S. 130-135. and Kleiner. Jong No. pp.. B. (1997) How to implement activity-based costing: Journal of Logistic Information Management 10(2). R. England: John Wiley & Sons Ltd. Cooper. (1990a). (1997).H. Available from: http://www. and Kleiner.
Turney. 11 . 1033-1047. 19th May 2011). Available from: http://www.htm [Accessed 12th May 2011].emeraldinsight. P.pdf.B. Vaughn.com/09596119.B. (2008) Activity –Based Costing.. C. (2010) The Application of activity-based costing to a support kitchen in a Las Vegas casino: International Journal of Contemporary Hospitality Management [Online] 22(7).B. P. & Nelson. SAS Official Home page (http://www. K.sas.com/resources/whitepaper/wp_5073. An Emerging Foundation for Performance Management. Raab.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue reading from where you left off, or restart the preview.