Optimal Costing System
Such a system is different from entity to entity. It depends upon an indepth analysis of costs and benefits associated with designing of an appropriate costing system. ABC system is definitely more scientific because it produces more accurate product cost, but such a system should be implemented when it is more economical vis-à-vis traditional costing system. Following factors should be taken into consideration before installing activity based costing system: 1. Extent of Competition, 2. Standardization of product and 3. Proportion of overhead cost to total cost.
To conclude, activity based costing system may be more appropriate when competition is fierce, enterprise produces varied products, without standardization with regard to consumption of resources and when overhead cost assumes a large proportion of total cost.
ABC requires the following:
1. Setting-up of an information system which could help trace all the costs objects.
2. Support from top to bottom because the system involves people at all levels.
3. Integration of system into financial system. For it, computerization may be required.
The final words of comment over ABC system are that adoption, implementation and operation of the system is not an end in itself. The benefits can be derived by translating the system design and its operation into action – oriented managerial performance. Ultimately, it amounts to effective cost management for the success of the system.
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