Before this moment direct labor represented a substantial cost item and it was believed that direct labor costs and overhead costs were very strongly correlated.
Over the years as a percentage of total costs, direct labor and direct material costs were shrinking due to technological advancements and the strong correlation between direct labor and overhead costs became implausible. In other words, products total costs were significantly distorted, if using the outdated assumption of traditional costing system.
Furthermore, business conditions changed dramatically as companies were no longer producing few products in massive volumes. Most companies produce and sell large variety of products that consume different amounts of overheads. This indicates that only little space is left to major simplifications concerning the determination of products total costs.
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Figure 2: Change in the structure of costs after s Source: own processing Moreover, information and communication technology overcame the barriers of data gathering long ago, thus facilitating the rise of a more sophisticated costing system called activity-based costing. It is very important to accentuate that traditional costing system provides inappropriate data for decision making.
On the other hand, existing data are not necessarily bad as much as they are somewhat distorted, incomplete and unprocessed.
The chart of accounts view provides information that is summarized in a monthly report of single responsibility center claim processing department.
Manager is not able to estimate the amount of controllable costs as well as has no insight into the content of work of employees from this point of view.
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Biggest disadvantage is that manager sees costs reported as lump sums. Activity-based costing resolves this problem by focusing on activities, thats why general ledger account balances are converted into activity costs.
This new, converted ABC cost data can be used in making product, market or customer-oriented decisions.
Another difference is that activity based costing uses verbs and nouns in the so called Bill of Activities to denote individual activities. This wording gives certain flexibility because managers gain new insights into the work of employees and activities can be favorably impacted, changed, improved or eliminated. Managers are able to control the overspending of budget target and impose tighter budget restrictions if needed.
Apparently, activity-based costing is superior to traditional costing system, but it does not replace the traditional accounting system. It restates the same data and adds operating relationships to more effectively support decision making.
Activity-based costing is not an accounting system, although it uses past information. Some opponents may criticize the relevance of past costs.
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But the opposite is true. These conditions, if repeated, are likely to cause the same inefficiencies today or in the future. This means that knowledge of past inefficiencies can be an incentive to corrective actions towards efficiency.
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Activity-based costing is an economic model designed to inform management about economics of its past, current and future operations. This is the reason why ABC cannot alat slimming purut referred to as accounting model because its utilization is not limited to past financial information.
Budgeted, forecasted or even targeted expenses or quantity data can be the input for this model.
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This enables to predict the activity expenses and activity driver information to obtain estimated spending for future activities and resources. Used in this way, ABC becomes a powerful tool for budgeting future expenses.
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Using forecasted activity expenses, presuming efficient operations, ABC can be used as a target costing mechanism. Budgeted information can also be helpful face avorturi vă fac să pierdeți în greutate eliminating inefficient, non-value adding activities from operations.
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ABC model based on current and forecasted information can reveal whether patterns of past will persist in current or future periods. Today the margin for error is slimmer.
Companies cannot make as many mistakes as in the past and remain competitive at the same time. Price quotations, capital investment alat slimming purut, product mix, technology choices, outsourcing and make versus buy decision today all require keeping a closer look at.
As more competitors understand better alat slimming purut cause and effect connection that drive costs and are fine tuning their processes alat slimming purut prices, the resulting price squeeze resulting from intense competition is making life for businesses much more difficult relative to the past.
Knowing the real product costs, customer related costs and profitability is becoming vital.
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With ABC, companies can identify where to remove waste, low value adding costs alat slimming purut unused capacity plus understand what drives their costs. This was done as simply as possible but the simplified ABC Cross does not capture the real value of cost accounting that emerged after s Euske, Vercio, The classical as well as the enhanced ABC Cross, which displays better the interaction of process and costing is going to be presented.
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The first was to display the relationship among process and cost.