(Love) ACC 403 SLP 4 Activity Based Costing Essay

(Love) ACC 403 SLP 4 Activity Based Costing - Essay Example The concept of Activity Based costing has its origins in the U.S manufacturing industry, where increases in technology led to a decrease in fixed costs and increase in variable costs and the number of steps in each manufacturing process as the automation process increased. For example, manual labor declined as robotics was introduced in the automotive industry, while the number of mechanistic processes and increased use of machinery meant that depreciation and replacement costs went up. Activity based costing is, as the name implies, based on determining the costs of different activities involved in the manufacturing or production process, and then identifying the costs of each activity (Kaplan & Cooper, 1988). In a company like Apple, there are also a number of activities involved in manufacturing its laptops, PCs and monitors. While traditional accounting takes into account only the cost of activities actually performed, activity based costing also includes the wait time for inventory parts etc. which are also included in overall costs of production. Activity based costing has been used to define re-engineering processes and eliminate unnecessary costs and processes (Kaplan & Cooper, 1988). Activity Based Costing is implemented by first identifying the cost drivers for each activity. Cost drivers are the basis for allocating product costs to the activities performed. Volume and Time are the most commonly used cost drivers (Turney, 2010)- everything else is attributed to a charge that is directly allocated to the activity in question being performed (Kaplan & Anderson, 2007). Volume means units of work or products produced. Time means length of time taken to complete a specific activity. If Activity Based Costing was used at Apple, we could have the following chart for activities performed from Jan 1-Dec 31, 2011: In practice, many difficulties are encountered while