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Title: |
Improved Product Cost Accuracy and Cost Reduction Using Activity Based Costing |
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Source: |
International Conference on Engineering and Business Management 2012(Part 3 Engineering and Project Management)
(pp 1807-1812)
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Author(s): |
Michael L. Werner, School of Business, University of Miami, Coral Gables, USA;University of Shanghai for Science and Technology, Shanghai, China
Fuyuan Xu, University of Shanghai for Science and Technology, Shanghai, China |
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Abstract: |
The calculation of product cost in modern enterprises includes assigning overhead costs to products, whether those “products” consist of services or more traditional products. Direct material and direct labor cost can be traced directly to individual products or batches of products. Overhead, however, is another matter. Because overhead is an indirect cost and benefits more than one product, it is difficult if not impossible to determine the true overhead cost associated with individual products produced. The resources included in overhead are an important component of manufacturing product. Traditionally, overhead costs have been allocated to products using allocation bases which are correlated to the incurrence of cost such as direct labor hours, direct labor cost, or machine hours using one or few plant-wide allocation base for this purpose. The resulting product costs are reasonably accurate and used for both external financial reporting and for the management information used internally for management decisions. The problem with this traditional approach to overhead allocation is that it does not provide costs that are accurate enough for management decisions and it offers no help to firms in their efforts to reduce costs. Activity based costing is a technique that allocates cost based on activities and volumes that cause cost to occur. The use of these cost causes, called cost drivers, significantly increases product cost accuracy and also encourages managers to take cost-cutting actions that result in true cost savings to the firm. This paper will explore activity based costing and how it can be used to increase product cost accuracy and to help reduce costs.
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