Activity-Based Costing for Marketing and Manufacturing

Activity-Based Costing for Marketing and Manufacturing

Activity-Based Costing for Marketing and Manufacturing

Activity-Based Costing for Marketing and Manufacturing

Synopsis

Activity-based costing emerged as an important accounting concept in the mid-1980s in response to global competition. There is an urgent need to place it in perspective, so that both production and marketing managers know its advantages and its limitations. This book describes and explains where activity-based concepts fit in the cost and management accounting body of knowledge. It first shows the traditional framework of cost concepts, terminology and techniques in order to demonstrate how the activity-based methods can bring about constructive changes in financial control systems. Next, it describes and illustrates the activity-based costing systems for both marketing and manufacturing. Finally, it includes illustrations of the most important cost analysis and control techniques that every successful operating manager must know.

Excerpt

The traditional cost accounting systems used in the United States are being challenged by corporate financial and production executives and by professors of both accounting and production management. A major controversy over the relevance of the traditional cost accounting systems has emerged. There are two opposing viewpoints, one that points directly to the traditional cost accounting system as a major contributor to the diminution of productivity in selected U.S. industries, and the other viewpoint that the cost accounting system is not a direct cause of production problems. Those who support the first position propose a major overhaul of traditional accounting systems in order to solve production problems resulting from world-class competition. Those who take the opposing viewpoint are convinced that the production systems need the overhaul and that the traditional accounting systems cannot directly cause production problems. They point out that management accounting cost systems are already flexible and custom designed so that only minor tune-ups are necessary to accommodate the changes brought about by world-class competition.

THE DIRECT LABOR CONTROVERSY

One of the main arguments of the critics of traditional cost accounting systems is that the use of direct labor in the allocation of factory overhead is becoming inappropriate as it decreases as a proportion of the total manufacturing costs. Why does the cost accountant use direct labor as the basis for allocating overhead? Direct labor, which in most cases varies directly but not always proportionately with output, is the reason for a greater proportion of overhead than any other direct input. People use the cafeteria; the rest rooms; the payroll office; the personnel office; the health . . .

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