Essays on ACTIVITY-BASED COSTING

Activity-based costing is a costing model which defines different activities in the organization in order to assign the cost of each activity. Indirect costs which include, for example, salaries of the staff in the company are difficult to assign. Activity-based costing is a special managerial accounting system which can easily determine the cost of activities without any distortion. It is known that activity based management completely relies on activity based costing system as it helps to specify the existence of non-value added activities and to estimate the the financial benefits based on their elimination. (Cost-Cutting Activity, 1998, para.1)

As activity-based costing is considered to be one of the most important management innovations, it is very popular both in business and industry. The differences between this cost accountant method and other traditional cost accounting methods include the following ones:

• In activity-based costing system “cost objects consume activities” while in traditional cost accounting method “cost objects consume resources”.

• Activity-based costing is “a process oriented method” while traditional cost accounting method is “a structure oriented method”.

• The drivers are used at different levels in activity-based costing system while in traditional costing accounting method, there are “volume related allocation bases”.

 The main idea of activity-based costing method is “to change the way in which costs are counted”. (Cost-cutting Activity, 1998, para.2)

PROCESS VALUE ANALYSIS

Process Value analysis is a special strategy which is successfully used by different business organizations in order to find out if all their operational expenses are necessary in this or that situation. Process Value analysis finds the ways which will help to operate more efficiently. Moreover, process value analysis “looks at the needs of the customer”. The major goal is to reduce the expenses which are unnecessary in the process of producing goods or services. Of course, customer satisfaction should be taken into consideration.

SOME ANCILLARY CONCEPTS AFFECTED BY THE USE OF ACTIVITY-BASED MANAGEMENT

Management of the value chain

Management of the value chain is considered to be “an integration of all the resources” including information and materials, different facilities and labor. The major goal is to find the right solution which will make it possible “to maximize financial resources” to a great extent and minimize waste as it is possible in this or that situation. One more important thing is that management of the value chain guarantees full interaction among all the members of the chain. It means that management of the value chain will result in “lower inventories, higher customer satisfaction and shorter time to market”. Some experts consider that business cannot exist without value chain management. (Trombly, 2000, para.2)

Total quality management

Total quality management is a special comprehensive approach to organizational management which has the major goal to improve the quality of products and services through some appropriate requirements. The total quality management requirements are established according to the International Organization of Standardization and can be applied to different types of organizations. It is known that it was originated in the manufacturing enterprises, but now it can be applied to any type of organization such as churches, hotels restaurants, schools, universities and so on. The most important thing is that total quality management is focused on the customers’ point of view. There are four major stages in the total quality management process: planning, doing, checking and acting. All of them are very important for improvement of the quality of products and services. (Ross & Perry, 1999, p.12)

Just-in-time inventory management

Just-in-time inventory management is a so called management which stands for the process of ordering and receiving necessary inventory for production of goods, but only when it is of great necessity and not beforehand. Just-in-time inventory management is for those organizations which operate with low inventory level. This strategy is very effective as it lower the organization’s inventory carrying costs. (Peavler, 2010, para.1)

As the major goal of just-in-time inventory management is “to improve return on investment by reducing non-essential costs”, it is very effective for many organizations. One of such organizations which successfully implements this cost cutting inventory management strategy is Tayota Manufacturing. (Peavler, 2010, para.3)