EVALUATION OF the activity based costing model

STUDENT NAME: MAHZI Mohsine
STUDENT NUMBER: 101343
COURSE NAME: Management accounting and control
DEPARTMENT: MSc CF

SUPERVISOR: PILKINGTON Mark

DATE OF SUBMISSION: 16/12/2010
CONTENTS

INTRODUCTION 2
WHY DO WE NEED ABC: A RESPONSE TO THE CHANGING ENVIRONEMENT (cost distortion problem) 2
WHEN DO COMPANIES IMPLEMENT ABC 2
WEAKNESSESES OF THE ABC COSTING 3 A complex model with a debatable relevance 3 Important measurement errors 4 A long set up 4 Updating difficulties 4 Misleading in the decision making process 5 Subjectivity 5 Ignorance of internal constraints 5 Wrong assumption of linearity between activities and resource consumption 5
SOLUTION PROPOSED BY KAPLAN AND ANDERSON (2005): TIME DRIVEN ABC 5
CONCLUSION 6
References 7
INTRODUCTION

Activity based costing (ABC) is a model that identifies the activities of an organization and assigns the costs of each activity to products and services within this organization. ABC is particularly concerned about assigning overheads or indirect costs.
. It is claimed that “Activity Based Costing (ABC) is the perfect cure for the problem of assigning overheads to products and services within organisations”. This paper will critically evaluate this statement by answering the following questions:

1- Why is ABC costing needed? What factors led to the development of this costing model? 2- When do companies decide to use ABC? 3- What are the weaknesses and the limitations of the model? 4- What are the solutions to cope with those lmitations?

WHY DO WE NEED ABC: A RESPONSE TO THE CHANGING ENVIRONEMENT (cost distortion problem)

The manufacturing environment on which the development of traditional costing methods was based changed. As a matter of fact, companies moved from an environment characterized by “high volume production, long production runs and life cycles, small number of product variation in