Question

Question below.

Your boss, the vice president of corporate accounting, has just returned from a two week seminar in Maui on activity based cost accounting. He says he wants to completely overhaul the companys existing absorbtion-based accounting system. "Accounting -based costing is the wave of the future and will allow us to make better product-line decisions and therefore be more compettitve in the marketplace". he asserts.  

He wants you to star implementation immediatley, but he would like your comments before you begin. How do you respond?

Answer 1

To

The Vice President

Corporate Accounting

Comments on Activity Based Costing System:

The absorption based accounting system has been a great involvement of the absorption of the overhead to the production line or production. As per the present absorption policy, the pre-determined overhead rate is the base to assign the overhead. This system treats the each and every product uniformly in assigning overheads and indirect costs, which is not correct because each product do not raise the overhead at same rate.

In this more competitive world, it would be better to assign the overheads and indirect costs is a more aggressive and refined manner to know the profitability of the various products. The Activity based costing system allows us to resolve the product line decisions by classifying the costs, specially the overhead and indirect costs, on more reliable costing data and assigning the overhead and indirect costs to various products on less arbitrarily manner than the traditional Pre-determined costing method. It uses the reliable cost driver or base or activities like event, unit of work, machine hours, labor hours and more to assigned the overheads and indirect costs. The products are assigned the overhead costs more precise manner here.

So, we must switchover to ABC classification system from traditional system.

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