Comparing Traditional And Activity Based Costing In Malaysia

The Process of Activity Based Costing

This report is all about choosing a topic and then choosing two articles on them.

The topic of Activity Based Costing has been chosen. This is the technique which helps in the allocation of all of the overheads to the items that use the same. This is the system which is used for the purposes of targeting the reduction of the overhead costs. This is the method that is best used in the environments and in the circumstances that are considered to be the most complex. This method is only used where there are machine and other products involved. This is the technique which tangles in the processes that are not easy to sort out. This method is lesser used in the streamlined environment wherein the different processes of the production are abbreviated.

The process of the activity based costing is based on the following flow:

1. The first and the foremost step is the determination of the expenses that are required to be allocated amongst the different products. This is the most critical step when it comes to the whole processes since there is no requirement of the wastage of time within the broader scope of the project. In order to illustrate, in case there is a determination of the costs of the distribution channel, then there would be a requirement of the identification of the costs that are related with the advertising and the warehousing. But this will go on to ignore the costs that are related with conducting the research since those are related with the products and not with the channel.
2. The second step is concerned with the loading in of the secondary cost pools. The costing pools are created for all of the costs that are incurred for the purposes of providing in the services to the other parts of the company. This is done instead of supporting in the products or the services of the company. The expenses that are included in the secondary cost pool include the computer services along with the administrative salaries and also such of the same costs. These are the costs that are then allocated to the other costing pools that relates directly with the products and the services. There are many of the secondary costing pools which depend upon the nature of the costs and the way in which these are allocated.
3. The third step is the loading of the costs in the primary cost pools. There is a creation of a costing pool which should be in way of the production of the goods and the services. It is of a common nature to have a costing pools for each one of the product line. These are the costs that would be incurred at each one of the level. These are the costs that include in the costs of research and development and this includes in the costs of advertising, procurement and distribution. In the same manner, one might want to consider the costing pool for each one of the distribution channel or for each one of the facility. In case, there are production batches that have changing lengths, then the costing pool would be created at that specific batch level. This is done for the purposes of assigning in the costs on the bases of the size of each batch.
4. The fourth point is the measurement of the activity drivers. This step uses in the system of data collection which is used for the purposes of collecting in the information about the drivers of the various activities. These are used for the purposes of allocating in the costs in the primary cost pools to the cost objects. This could turn out to be very expensive if the activity drivers are accumulated all at one place and so, the information pertaining with the activity drivers are used wherever possible.
5. The next step is the allocation of the costs in the secondary pools to the primary pools. The next step is the apportioning of the costs in the secondary cost pools to the primary cost pools.
6. The next step is the charging of the costs to the various costing objects. The activity drivers are used for the purposes of allocating in the contents of each one of the primary cost pool to the various costing objects. There is always a separate driver for each one of the activity for each one of the cost pool. For the purposes of allocating in the costs, the total amount of the costs is divided in by the total amount of the activity in each of the activity drivers. This is done for the establishment of the cost per unit of the activity. Then the allocation of the cost for each one of unit to the different cost objects is done. This is based on the use of each one of the driver of the activity.
7. The last step comes out to be the formulation of the reports. The costs that are derived from the use of the above stated method is converted into reports so that the same could be used in by the management. In case, the system is designed for the purposes of the accumulation of the information pertaining to the overheads, then the report shall be of all of the revenues for each region and would include in the direct costs and the costs that are driven in from the system of ABC. This helps the management in giving in a true and a fair view of the picture of the results that have bene generated in by the system.
8. Then the most common reaction of the system is the reduction of the quantity of the drivers of the activities that are used for each one of the cost object. When the management uses this technique, then the amounts of the overhead would get reduced (Bragg, 2018).

The main aim of the first article is to compare in the concept of activity based costing with the traditional based costing. The article also talks about the reasons to why the concept of activity based costing is still very much behind the concept of traditional based costing. In the country of Malaysia, there are many of the companies that are still using the technique of traditional based costing whereas there are others that are using some of the other techniques of costing.

The second article talks about the use of the technique of activity based costing which relates with the use of Theory of Constraints. The authors state the fact there is an alternative which could be used to the activity based costing. The article talks about the use of the activity based costing technique in the universities and this adds in the importance to the question of the appropriateness and this could have the bearing on the design of the system of accounting and also on the financial analysis that any university would desire in. the concentration of this article is on the issues of the technique of activity based costing in the university environment and how the same is inappropriate. For the stated purposes, the alternative of throughout accounting has bene put forward.

The authors suggest that the developed countries shows in the rate of the use of the activity based costing as high as about 73% in UK. And about 86% are of the company’s uses this technique in the country of Japan. About 9% of the 231 companies were used to survey in UK. But there are still 63% of the managers that use f technique of traditional costing and are satisfied with the results that this technique gives out. Another author suggests that about 76% of 303 accountants in UK and about 75% of the 85 finance and accounting specialists in the country of New Zealand still use the technique of standard costing. The authors state the fact that the techniques of modern costing and the tools of the production management have no effect on the way these costing techniques are used. Further, the article talks about the implementation of the activity based costing as being the substitute of the traditional based costing. The article states that the activity based costing is far more used as the contemporary costing system. The authors suggest that the technique of activity based costing is the method that measures in the costs and also decides in the performance of all of the activities along with the various cost objects. Both of the techniques compete as against each other.

Comparison of Traditional and Activity Based Costing

The main reason as to why the companies have the disparity in the nature and the scope of this information is due to the system which is involved. In order to illustrate, the system of costing may go on to change in the capacity of the information for the purposes of the measuring in the performance. This could also include in the enhancement of the revenue, the efforts of the reduction of the costs. One technique of costing could better cater to the needs of the company rather than another costing technique. There are many other factors that decide on the use of the costing technique, the frequency of the operation at capacity along with the nature of the competition that could go on to favour in the acceptance of some particular type of the system of costing. In the stated case, there was a difference between the quality of the information which has been offered in by the system of costing and the frequency of the usage of these techniques all across the industries. Further, it could be stated that the larger companies use in the technique of activity based costing whereas the smaller companies use the traditional based costing method. The article concludes with the fact that there are many of the companies that have converted into the use of the system of activity based costing but still there are many more companies that still use the old technique of traditional based costing which was developed in the era of globalisation. The difference is mainly due to the fact that both of these techniques have their own set of pros and cons which are very much important for any given company. The companies consider both of these pros and cons of each one of the method of costing which is much more appropriate. There is as such nothing that could best describe in these techniques and decide on to the best technique of costing (Devinaga, 2011)

The second article states the fact for any technique of costing to be used in the company, the needs and the requirements of the company must be looked upon. There is no point in implementing such a complex technique of costing in the company which neither had the will or the capability of meeting the needs of the company. Then there are some of the other factors that affects the type of the costing which is required. Also, there are some of the other costing systems that could be used in this respect. Another factor that could be used for the purposes of determining the costing technique to be used is in the case of universities. The point that could be considered in the universities involves the facilitation of the control of the costs instead of providing in the costs for the purposes of making the decisions of the longer term. Hence, the technique would be apt for the universities would mean in the identification of the way in which the various costing of the activities would be identified in instead of avoiding in the total amounts of the costs in the longer run. This article further talks about the different ways of using the costing techniques especially when it comes to the costing of the schools and also the course costing which would meet in the requirements of the company which would face in the challenge of the business environment. The apt costing technique that could be implemented in the company would depend upon the fact that would cater in to the amount of the pressure which is being exerted on the stability of the company. For the purposes of satisfying in the needs of the techniques of costing, the university could be called in for question and the theory of constraints could be considered which would serve in as an alternative mechanism of the costing.

The author further states that the environment in which the universities function today adds importance to the equation of the aptness of the technique of costing that could be added and the type of the accounting system that could be used along with the financial analysis that the university requires in

The main difference between the two articles is the fact that the first article talks about the difference between the adoptions of the two of costing. This means that there are companies that adopt the traditional method of costing and then there are other that adopt the activity based costing technique. The reasons due to which there is such a difference.

The second article talks about the adoption of the appropriate technique of costing in the universities. This article also lays down the issues that exists when it comes to the implementation of the technique of costing of activity based costing. The second article talks about the difference between the costs when ABC is used for the purposes of determining in the costs under the various different courses.

Both of the articles talks about the costing technique of activity based costing. Both of the articles talks about the ways the costs are calculated under the activity based costing. Both of the articles conclude with the fact that the objectives with which the costing technique is adopted should be able to cater to the needs of the company or the university.

Conclusions:

The following are the outcomes r the lessons learnt:

1. The base on which the costing techniques are to be applied into the system must be clearly defined. This means that the university or the company must know the exact nature of the techniques and whether it would be able to meet the long term decision making aim of the company and the university.
2. The traditional technique of costing is being used more efficiently than the activity based costing.
3. Where on one hand, the activity based costing technique has advantages, it also has many of the disadvantages which needs to be considered by the management when deciding on the costing technique being adopted by the company or the university.
4. When deciding on the costing technique, both the companies and the universities have both the internal and the external pressures that helps them in deciding in on the costing system that must be used.

The company’s must do a detailed financial analysis of the reports that are generated from both of techniques of costing since that would help it in deciding in on the best costing technique that could be used.

References:

Bragg, S. and Bragg, S. (2018). Activity based costing. [online] AccountingTools. Available at: https://www.accountingtools.com/articles/2017/5/14/activity-based-costing [Accessed 30 Sep. 2018].

devinaga, R. (2011). Why Activity Based Costing (ABC) is still tagging behind the traditional costing in Malaysia?. [online] Search.proquest.com. Available at: https://search.proquest.com/business/docview/901980429/FD85EB94F70C4B4CPQ/7?accountid=30552 [Accessed 30 Sep. 2018].

Martin, B. (2001). Activity based costing in universities – An inappropriate technique?. [online] Search.proquest.com. Available at: https://search.proquest.com/business/docview/1031187247/fulltextPDF/4BB1B89421C74C86PQ/1?accountid=30552 [Accessed 30 Sep. 2018].