STRENGTH AND WEAKNESSES OF ABC

ABC produces more credible product cost information but is nonetheless a

system of allocation. For plant-level cost, ABC has little or no advantage over
traditional costing. A partial solution to this problem is simply to allocate no
plant-level costs to products, batches or units and instead to treat plant-level
costs as period costs.
ABC requires managers to make a radical change in their way of thinking about
costs, does not show the costs that will be avoided by discontinuing a product or
by producing fewer batches of it, and also requires data-gathering effort beyond
those needed to satisfy external reporting requirements.
ACTIVITY BASED MANAGEMENT (ABM)
Activity-based management is the use of information obtained from ABC to make
improvements in a firm. ABC information can help management position in a firm
to take better advantage of its strength. Within a single facility, ABC information
can show the inefficiency of producing special-order, customized products on
equipment designed for long production runs. Then, improving the firm also
concerns ABCs revelations about the process used to produce goods and
services. ABC required information that traditional accounting neither needs nor
provides. First, it is neccesary to measure each activity cost pool, and second it
must select the best activity driver for allocating each activity cost pool.
Many traditional systems report the costs of each managers responsibility area
for purposes of control and evaluation. These costs can be subdivided into
accounts such as indirect labor, supplies, and electricity. Traditional costing
systems do not measure the cost of activities, they measure the cost of each
cost center or department.
When management learns the total cost of each significant activity in the plant,
its attention is naturally focused on large amounts of resources devoted to some
activities. Recall the total quality management (TQM) which identify every place
in the organization where resources are expanded without adding value to the
product that is without increasing the customer satisfaction. Some of these
activities such as law and regulations are neccesary, others are not called nonvalue-added activities.
The contribution of ABC to this improvement process is subtle, management
does not need ABC to know that he resources devoted to setups should be
reduced. ABCs contribution is to measure the cost of setups and every other
significant activity, making it clear where improvement efforts shold be devoted
first.
BEHAVIORAL CHANGES
The design of the product is a third area in which activity cost information can be
used. If designers know the product must be sold for a certain price to be
competitive, they will make design decisions that reduce reported unit cost
below that price. One such decision is to use more direct materials and design
the products to be produced on machinery that requires little direct labor.
Problems with design decisions is that traditional costing systems do not capture
the cost of ordering, receiving and inspecting complex components or

subassemblies. Activity cost information can show the cost of each significant
activity, ABC can show whether it is more economical to set up and operate a
machine to make a par rather than to purchase it. In conclusion, ABC provides
information that can elicit the desired behavior because it permits designers to
make cost-based design decision logically.
COST CONTROL
Activity cost reporting provides an alternative to traditional responsibility
reporting and can help reduce dysfunctional behavior.