The Impact of Activity-Based Costing Assignment

The Impact of Activity-Based Costing Assignment Words: 2534

My deepest gratitude goes first and foremost to Mr.. Gavin Chon, my supervisor, for his constant encouragement and guidance. He has walked me through all the stages of the writing of this paper, especially the material researching and the graduation project guidance . Walkout Nils consistent Ana Illuminating Instruction, tens paper could not have reached its present form.

Secondly, I owed my sincere gratitude to my friends who gave me their help and time in listening to me and helping me work out my problems during the difficult course of this paper. The rapid growth and development of information and communication technology leads to a keen competition in the business environment globally. Traditional costing systems have worked well for many decades and may continue to be useful today to value inventory and measure the cost of goods sold.

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However, practitioners are facing various challenges using the traditional costing systems in today’s competitive environment. As a strategic cost management tool, activity-based costing (BBC) plays a vital role. To define in banking industry, activity-Based Costing (BBC) is a system for the calculation of the cost of products and services, while the cost components arise from the activities related to the development, administration, and sale of the product.

The recycling approach uses documentation of processes that have already been developed for other purposes (Hilton, Maier, ; Sells, 2003). For the activity- based costing (BBC) project, the bank used all three of these approaches to identify an classy cutlasses. 2. 1. 4 Cost drivers Carroll claimed that Activity-based costing (BBC) allowed managers to get rid of costs related to non-value added activities and develop the efficiencies of present development since Activity-based costing (BBC) offered better visibility into business development and their cost drivers.

When information visibility improved, it also enabled the consumption of quality-related initiatives by classifying activities that were related with poor product quality, and their cost drivers (Carroll, 1996). 2. 1. 5 Performance measurement Apart from that, another advantage of this system is performance measurement. Kingston indicated that the information provided by Activity-based costing (BBC) on cost drivers and cost driver rates illustrated that there are potentially powerful affect on the deed of staff and they are used as performance determined (Kingston, 1991).

Cost drivers provided volume determined on a different kind of operational performance which reflected the effectiveness and accuracy of the activity concerned. So, they helped in assessing the efficiency with which activities were carried out when it was linked to cost. . 1. 6 Technology acceptance model (TAM) The Technology Acceptance Model (TAM) is an information systems theory that models how users come to accept and use a technology. The model suggests that when users are presented with a new technology, a number of factors influence their decision about how and when they will use it.

Since users’ perception and intention can change over time, it is essential to examine these changes at several points in time through the TAM. TAM is an appropriate technique to explain the factors that might affect BBC usage (Fatheaded, 2007). 2. 1. 7 Perceived ease of use Perceived ease of use is defined as to which a person believes that using a particular system will be free of effort. Among the beliefs, perceived ease of use is hypothesized to be a predictor of perceived usefulness. Both types of beliefs are influenced by external variables e. G. Computer self-efficacy.

Furthermore assuming that other things are being equal, the easier is a technology to use, the more useful it can be. (Fatheaded, 2007) 2. 2 Related literature 2. 2. 1 Concept and meaning of the activity-based costing Activity based costing (BBC) used in banking industry is based on actual performance, insulation and expense data taken out from the banks existing information system and combined with the knowledge of those directly involved in the distribution of goods and services. Here the cost is designated to activities based on the resources they use for processing.

The activity based costing (BBC) also provides insights into the starting place of costs and also the probable outcome of different echelons Dye ten process managers. Apart Trot provoking ten International required for this process, it also realizes performances breakthrough. (Gary, 2006) Paul Sherman is president of Focused Management Inc. Saukville, Ontario, said that “Activity-based costing identifies the actual cost of activities by determining what resources were consumed by each activity and how much they cost. Then, it applies those costs to products, services, customers, and channels. (Paul, 1991) Bank use activity-based costing (BBC) system produces quite different results because, when implemented properly it simulates the way in which actual activities actually consume resources. Activity-based costing (BBC) then applies the output of activities to the objects of those activities, for example, the cost of a sales call is signed as a cost of serving the specific client or segment according to the level of detail required in the analysis. Note that if there is no product orientation to an activity, then no allocation is attempted (Paul, 1991).

In banking industry, there are many different assignment paths in activity-based costing (BBC), but the principles of assignment are very straightforward. If a resource or activity is actually used by an object, then the cost will be assigned to that object. If the object does not use certain resources or activities, even though they exist, then one of their cost is allocated to the objects. Using this approach, activity-based costing (BBC) identifies the actual cost of activities by determining what resources were consumed by each activity and how much they cost (Figure 1).

To be effective, used in banking industry all of the activities should be defined correctly, that is, the activity is real and all material activities are identified, whether they contribute to the processing of transactions or not. Figure 1 (Paul A. Sherman, 1991) A commercial bank can be defined as a combination of various activities (Song & Yang, n. D. ). Activity-based costing (BBC) is the determination of product cost based on the activity needed for producing a product.

The activities required to produce a product or render service consume a cost. Therefore, an insight into the expenses consumed by all those activities performed for the manufacturing of finished products and sale is very important. A number of researched studies have shown the increasing utility of activity-based costing (BBC) on overheads allocation and apportionment for product cost determination. Product cost determination under activity-based costing (BBC) is made on the basis of cost driver required for producing goods or delivering services.

Activity-based costing (BBC) is becoming more effective in costing of multi-products produced by banking industries and executing customers’ orders. Activity-based costing (BBC) is an effective management approach for distributing Ana controlling ten overeat costs It Is unhelpful Tort managers In commercial Dan Ks to reduce the unnecessary resources wastes. Overhead analysis can be made more accurate by using activity-based costing (BBC) techniques for a wide range of products, for product costing and profitability analysis and for distribution and intro of the overheads appropriately. . 2. 2 Application of the Activity-based costing in the banking industry The activity-based costing (BBC) is widely recognized as a superior method for allocating overhead costs. Much emphasis has been placed on the implementation of activity-based costing (BBC) in the manufacturing industry. However, the service industry benefits from this system of cost allocation as well, due to the fact that service firms usually have high overhead costs and are labor intensive. These characteristics make activity-based costing (BBC) a logical choice for cost allocation.

Activity-based costing (BBC) will help services companies identify and allocate overhead costs and quantify labor costs associated with each activity (Song ; Yang, n. D. ). For banking industry, in particular, the potential benefits of activity-based costing (BBC) implementation can be numerous. These include the proper costing of transactions, the ability to measure customer and product profitability Offer ; II-won, 2006). The end result of these benefits is the ability to improve decision- making and help organizations meet their strategic objectives.

Getting started with Activity-based costing (BBC) in a bank, first of all is to understand the competitive business issues of bank and then to determine how valuable activity-based costing (BBC) will be for the organization (Song ; Yang, n. D. ). According to a large commercial bank in the United States implemented activity-based costing (BBC), it published by Bank Accounting ;Finance in 2006 Offer ; II-won, 2006) and all of the article selected.

We can conclude four phases to implement activity-based costing (BBC) in banking industry: First phase is preparation and planning for activity-based costing (BBC). It has to get support from all hierarchies and all functional departments (Song ; Yang, n. D. ). The banks cost accounting manager introduced the concept of activity-based costing (BBC) to senior management because the cost accounting manager thought that an activity-based costing (BBC) system would be a viable solution for the banks product profitability concerns.

There are companies don’t want to consider activity-based costing (BBC) implementation as a future target. According to the findings of relevant researchers (Bosses, Cabin, & Selling, 2002) the main reasons for rejecting the implementation process of activity-based costing (BBC) might be satisfaction with the existing traditional cost systems, lack of management support and interest, implementation process associated with high costs, consumption of time and resources. The implementation of activity-based costing (BBC) must consider the costs and profits.

An activity may bring benefit to one department; it could also cause loss to another. Therefore, all functional departments and staff are involved in this project. Besides, it may lead to different evaluation results compare with the traditional evaluation system, so relevant departments may oppose it. It is a revolution of costing and evaluation for a bank to introduce activity-based costing (BBC). The application of it needs all hierarchies’ understanding and all departments’ cooperation.

The second phase is assessment of appropriateness of activity-based costing (BBC). Before engaging in a major activity-based costing (BBC) system implementation project, an organization should consider the appropriateness of an activity-based costing (BBC) system. While the benefits of activity-based costing (BBC) system implementation are evident to most companies, it is important to keep in mind that any companies have failed to realize all the benefits an activity-based costing (BBC) system provides.

Any company, especially a bank, considering an activity-based costing (BBC) system implementation should carefully assess the 6 points Offer & II-won, 2006), which are identified by many activity-based costing (BBC) experts in determining the appropriateness of activity-based costing (BBC) for a particular organization: 1 . Significant indirect costs; 2. Complex goods and services; 3. Losses on high-volume products and profits on low-volume products; 4. Disagreement by managers over cost allocations; 5. Id results; 6. Age of costing system.

Designing an activity-based costing (BBC) system and collecting necessary data is the phase 3. If managers want to make decisions using the information which is supplied by the activity information system, the update of the system will become a crucial factor (Song & Yang, n. D. ). After completing an assessment of the appropriateness of an activity-based costing (BBC) system implementation, an organization should give careful consideration to designing an activity-based costing (BBC) system that will meet the needs of the organization and then to collecting data squired to implement the system Offer & II-won, 2006).

In banking industry, it should follow four steps to design the system and collect data. Step 1: identify and classify the activities related to the company’s products. This step is to identify activities in all areas of the value chain. Generally speaking, the activities can be defined at two levels for a commercial bank (Song ; Yang, n. D. ). The first step is defining the major activities for every functional department. The second is defining even more detailed activities at the basis of the department activity level.

In banking industry, employees identify all activities that are performed to produce the products or services and then prepare a list called an “activity dictionary. ” As activities are identified, they are classified as unit level, batch level, product level or facility level Offer ; II-won, 2006). Unit-level resources and activities are resources acquired and activities performed specifically for individual units of product Ana service. Batch-level resources Ana cutlasses are ten resources cleared and the activities performed to make a group, or batch, of similar products.

Product- bevel resources and activities are the resources acquired and the activities performed to produce and sell a specific good or service. Facility-level resources and activities are the resources acquired and the activities performed to provide the general capacity to produce goods and services. When classifying activities, banks should consider that whether the activities are relevant to product batches, product cost per unit or product categories.

In addition, value contribution and function of activities should be taken into consideration. When noticing the value contribution, managers focus their attention on improving he efficiency of the activities (Song ; Yang, n. D. ). The objective of classifying resources and activities into categories is to create accurate descriptions of how the organization achieves its work and to have the ability to trace the cost of resources acquired and activities performed to produce goods and services.

According to the approach theory, for the activity-based costing (BBC) project, the bank used three common approaches: top-down approach; recycling approach and interview or participative approach to identify and classify activities (Hilton, Maier, ; sells, 2003). Step 2: estimate the cost of activities identified in step 1. Once activities have been identified, it is necessary to estimate the costs associated with specific activities.

These costs include both human resources, such as employee labor for maintenance and production, and physical resources, such as the cost of equipment and buildings. The total cost of each activity must be calculated using employee data from personnel interviews and financial data from the accounting department. Step 3: calculate a cost-driver rate for each activity. As soon as the activity cost data room step 2 is identified, it can be used to calculate cost-driver rates the bank should use for assigning activity costs to goods and services.

A cost-driver rate is the estimated cost of resource consumption per unit of the cost driver for each activity. This rate should use a base that has some causal link to the cost. In order to calculate an accurate cost-driver rate, it is necessary to know the total activity cost and the activity volume Offer ; II-won, 2006). The information from step 2 can provide the total activity cost. The activity volume is the total volume of the cost drivers fined in step 1 for this particular activity.

Once the activity cost and activity volume figures are determined, the cost-driver rates are calculated by dividing the total activity cost by the total activity volume. Step 4: assign activity costs to products. In the final step, the cost-driver rates prepared in step 3 were used to assign activity costs to goods and services at the bank. There are three key points for assigning activity costs to products and services Offer ; II-won, 2006). First, all the activities related to a given product or service must be identified.

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