The cost driver for Underwriting costs are "review hours' in the form of labor costs and the cost driver for Technology cost is 'IT hours'" (Kren 2008). In the scenario, some costs involve committed resources that cannot be easily adjusted while others do not. ABM provides guidance as to how to adjust the flexible aspects of the enterprise. For example, the average cost per hour for the Underwriting input at the plan level of activity is $44.13 but when the organization is operating at full capacity, the average cost per hour falls to $38.00, "because the cost of resource that is not needed is being spread over the service that is needed. Thus, one could argue that $38.00 per hour represents the 'true' cost because there is no excess capacity cost to burden the resource that is needed" (Kren 2008). Reducing non-full capacity operations is deemed critical to reducing costs. The format of the article is somewhat problematic. On one hand, the inclusion of helpful, clear definitions of ABM vs. conventional styles of accounting and cost control are illuminating. But there are no examples drawn from real life to show how ABM is better than conventional methods, although the rhetorical case the article makes is indeed persuasive. The inclusion of a single, extended,...
Nor are there any examples of conventional accounting methods to illustrate how they are inferior, and would result in less efficient cuts than ABM.
Activity-Based Costing Organizations that need help being more efficient and cost effective look to different concepts for help, one such concept is activity-based costing. Activity-based costing is used to manage an organization better and is meant to help with decision making by coming up with better information about the cost and performance of activities, resources and objects that consume resources ("Activity-based management -- an overview," 2001). This essay will discuss ABC
General & Administrative-costs cannot reasonably be associated with any particular product or service produced (overhead). These costs would remain the same no matter what output the activity produced. An example would be salaries of personnel in purchasing department, depreciation on equipment, and plant security. In the next step the results of analyzing activities and the gathered organizational inputs and costs are brought together, which produces the total input cost for
Activity-Based Costing in a Service-Based Organization Activity-Based Costing operates on the conventional approach and applies a two-stage allocation instruction and other cost drivers. First, the system identifies the important activities and overhead costs assigned to each activity in proportion to the resources used. Consequently, for each of these cost pools, cost drivers are identified. Secondly, the assumed overhead cost driver is assigned proportionally to the final outputs of the cost
Many organizations have sufficient control over their cost drivers, specifically those that work with activity-based costing; these companies can locate a sufficient amount of cost information within the company to accomplish these analyses in a timely fashion (Chatzkel, 2003). In reality, though, ABC systems are typically structurally complex and, in spite of the need for complete integration of such ABC systems, many such systems remain as stand-alone analysis tools
(Questions that will assist in quantifying the relationship between resources and activities include: How much time is spent performing each activity? What equipment is used to perform activities? Do some activities have dedicated equipment? Do some activities require more space than others?) After the data on resources have been collected, establish cause-and-effect relationships between resources and activities or resources and cost objects. The third step in the process is
ABC can identify high overhead costs per unit and find ways to reduce the costs, avoid decreases in head counts due to inaccurate allocation of costs, and measure profitability with higher accuracy than traditional costing that uses direct-labor hours as the only cost driver (Activity-based costing, n.d.). Bibliography Activity-based costing (ABC). (n.d.). Retrieved Apr 2, 2009, from Managers-Net: http://www.managers-net.com/activityBC.html Activity-based costing (ABC): What is it and how can reengineering teams use it?
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