Capp Stone

In: Business and Management

Submitted By wisdom
Words 884
Pages 4
Discuss how company’s can use activity-based costing to evaluate financial performance.
Activity-based costing can be used to evaluate company’s financial performance for management to improve profitability. Activity measures in both financial and nonfinancial forms. These measures are used to evaluate how well an activity how well an activity was performed and what was accomplished. They are setup to see if constant improvement is being realized. Measure of activity performance focuses on three major dimensions:
Efficiency which concentrates on the relationship of activity inputs to outputs. To improve activity efficiency is to produce the exact activity output with lower cost for the inputs used. Cost and trend then becomes important to measures of efficiency.
Quality main concern is doing things correctly the first time it is done. If activity is defective, activity will have to be repeated which causes unnecessary cost and reduction in efficiency.
Time required performing an activity which is critical. Longer times means, more intake of information and less ability to respond to customer demands. Time measures of performance are usually nonfinancial. (Palepu, Shank, Knapp, Gibson, Mowen, 2010, p.277)
Identify the pros and cons of using an activity-based system over functional-based cost accounting.
Functional-based overhead costing has two important stages: overhead costs are assigned to an organizational unit (plant or department), and the other is overhead costs which is assigned to cost objects. Activity-based costing (ABC) traces cost to activities and then to cost objects. The main assumption is that activities consume resources and cost object in turn consume activities. ABC is also a two stage process; however, ABC stresses direct tracing and driver tracing (exploiting cause-and-effect relationship. While a volume based costing system…...

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