According to Sandborn, 2017, Activity-based costing (ABC) is described as an accounting technique involving company’s activities and cost allocation to every products and services capital activities based on concrete utilization. More accurately, ABC ascribes indirect costs to direct cost goods. Moreover, ABC outline resources usage and costly ultimate outcomes, to monitor and incur costs on activities. Thus, allocating resources to activities and estimates consumption to assign these activities to cost objects (Monroy et al., 2014).
Costs and benefits in implementing an ABC system
ABC costing is very useful because organizations that use this form of accounting methods can effectively approximate the cost features of all services, activities and products. Therefore, it facilitates easier decision making in the elimination and identification of unprofitable items and reduce the prices of overpriced products (Monroy et al., 2014). It can also be used to eliminate or identify service or production processes that are unproductive and apportion concepts that contribute to better yields of the same products. The ABC is commonly beneficial since it acts as an instrument for understanding customer cost and products profitability depending on the performing or production processes. However, some of costs are challenging to allocate via this method. Moreover, this method is time-intensive and expensive to execute. It can also lead to data misinterpretation because it generates certain information, which varies from the data stated in the traditional method (Sandborn, 2017).
Background information about NANZ Company
The Nanz Company deals with manufacturing and designs of high-quality cabinet and door hardware. It also conducts fabrication, organization and fabrication of the custom hardware such as fittings, locks, hinges, and handles. The organization sells its goods via contractors, designers and architects in London, Greenwich, Chicago, Los Angeles, and New York (The Nanz Company, 2017). The process of production is on a project-by-project basis. The firm integrates ancient finishing techniques and modern industrial processes. Therefore, such products and processes drive costs.
ABC can be used in Nanz Company because the firm it has manufacturing operations to reduce production cost and raise its productivity. Therefore, it requires a method of approximating the costs of different products generated in the same firm in a precise and rigorous way (The Nanz Company, 2017). It will also be important for the Nanz Company because it identifies resources that are used by the activities as well as by the products. Moreover, it enables use of cost drivers to achieve resource distribution by activities and the consequent assignment to the products (Sandborn, 2017). The main purpose of this process is to deliver the intended results after execution of a manufacturing cost model.
The cost pools that it would use
The Nanz Company can use a number of cost pools, which include the indirect costs. Some of the cost pools include factory maintenance, equipment maintenance, showrooms rent, electricity, fringe benefits, and payroll taxes (Monroy et al., 2014). The ABC will enable accurate costing of product that other kinds of accounting processes (The Nanz Company, 2017). The activity cost pools are essential since they facilitate grouping of related overhead costs.
Recommend the process it would need to implement ABC in the firm
Nanz Company should use an ABC implementation process, which will help to realize its goals. The first phase should be activity identification and properly grouped in the activity pool. In this regard, activity pools should support activities that link to a product service or line. The pools should involve fractionally allocated costs for assisting activities to distinct products. Secondly, the Nanz Company should conduct activity analysis where it clearly identify the processes which reinforces a product and evade some of the inaccuracies of out-dated costing (Sandborn, 2017). The activity analysis should be used to ascertain indirect cost and permits allocation of activities to the outputs. Thirdly, the Nanz Company should implement costs assignments to an activity pool. For instance, it should assign human resources costs to indirect management or indirect administrative costs (Monroy et al., 2014). Fourthly, it should calculate the rates of activity such as indirect labour support and direct hours of labour. Such activities should be allotted a value in terms of currency. Fifthly, it should apportion activity rates, cost, and pools to cost activity. Finally, it should prepare and disseminate the reports.
Monroy, C. R., Nasiri, A., & Peláez, M. Á. (2014). Activity Based Costing, Time-Driven Activity Based Costing and Lean Accounting: Differences among three accounting systems’ approach to manufacturing. In Annals of Industrial Engineering 2012 (pp. 11-17). Springer London.
Sandborn, P. (2017). Activity-Based Costing (ABC). In Cost Analysis of Electronic Systems (pp. 77-92).
The Nanz Company. (2017). The Nanz Company. Retrieved December 26, 2017, from https://www.nanz.com/company/