The case study is performed on AVL Textile Company to find out the difference in product costs resulted from the company’s traditional cost management system and newly implemented ABC (Activity Based Costing) system. AVL Textile Company is Pakistan company that produces wool and polyester products. AVL Textile used Absorption Costing as the traditional cost management method. To analyze the difference between results generated from Absorption Costing and ABC system, calculation for five products was done using the two methods and results were compared. The authors thoroughly evaluated both systems. They found Absorption Costing is not a sufficient tool for the company’s situation, while ABC system can be successfully implemented for cost analysis. The cost of product calculated from traditional method is much lower than the one from ABC method.
The Benefits of ABC
ABC helps manager to gather correct information from each cost driver and produce results with high accuracy. The magnitude of ABC is to calculate based on different cost drivers of the activities demanded by each department such as production, services and sales, and generate a sum of cost of all resources. Comparing with traditional method allocating cost of service to production department, ABC method increases the accuracy of the cost analysis in a great extent. With accurate and detail data of activity usage provided by ABC system, management is able to implement effective decision on cost control. If available resource is higher than activity usage, management should cut down unused resources. On the other hand, if available supply is less than activity usage, increasing the supply must be considered.
The problems in implementation of ABC
A big problem that AVL Textile encountered during implantation of ABC is that the full-time availability of employees. As a company with 21% of hourly employees, resistance of employees from working full time hours remained a challenge during...
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