AMA

Topics: Costs, Cost, Fixed cost Pages: 12 (1725 words) Published: April 1, 2015

Table of content

1. Outline of chosen Hong Kong company………..…….……………….P.3

2. Characteristics of an organization contributing to the use of activity based techniques ………………………………………………………….……P.4-5

3. An appropriate ABM example in chosen company……......................................................................................P.6-8

4. How the ABM information can be used by managers………………….……………………………………...……….P.9

5. Problem causing an organization to decide not to use or to abandon use of activity based techniques…………………………………………P.10-P.11

6. Reference List……………………………………………….…………………..……P.12

Luen Yick Electrical Mfg Co., Ltd.

Since 1968, the group has been a manufacturer of electrical accessories and
lighting products with a wide range of furniture and bathroom lights, fluorescent,

energy saving and LED lighting products to the international market. From

product design to final assembly, all production processes are done in-house,

which makes customizing products easy for us.

Number of employees: 201-500

Year Established : 1968

Nature of Business : Manufacturing

Major export markets : Hong Kong

Products / Services: electrical accessories and lighting products

Activity Based Costing (ABC) is a costing methodology used to trace overhead costs directly to cost objects, i.e. products, processes, services, or customers. Costs are assigned to specific activities (e.g. engineering, manufacturing or purchasing) based on their use of resources and costs are assigned to cost objects based on their use of activities. ABC recognizes the causal relationship of cost drivers to activities. ABC techniques enable a business to decide which products, services, and resources are increasing their profitability, and which are contributing to losses. Certain organizations appear to be more successful in implementing ABC than others. ABC helps the managers in these organizations to make the right decisions regarding product mix, pricing, process improvements and product designs. Closer look reveals characteristics of an organization such as structure, product range or environment contributing to these successes. Cost Structure

Where overhead costs comprises major portion of product costs as compared to direct costs such as direct labour and direct materials, correctly attributes overhead costs to product is highly important. In modern business, service departments plays a more and more important role than in the past in which production department is mainly responsible for key manufacturing activities. Overall product and service costs are more influenced by research, materials handling, procurement, equipment maintenance, quality control and customer service requirements than by direct labor or direct materials. Therefore, ever-increasing cost of these service departments must be traced to the final product so that correct pricing and product mix position can be made. ABC is certainly excels traditional costing method which distribute overhead cost using an overhead charging rate. On the other hand, if indirect costs make up a relative small proportion of total costs in some industries it may not be worthwhile investing in sophisticated accounting methods to allocate indirect costs. Traditional costing systems may not result in the reporting of seriously distorted costs in this case.

Product Range
One homogeneous overhead rate is no longer an appropriate average for overhead cost allocation in company which involves huge product variety and product line complexity. Since overhead resources are used by different products and product lines at substantially different rates, a change in product mix can lead to dramatically cost changes that will not be predicted accurately by traditional cost systems. Arbitrary costs under traditional costing method leads to incorrect make/buy decisions. Therefore, companies with wide product range are more prone to accepting ABC techniques...

References: 1. Roztocki, N., Valenzuela, J. F., Porter, J. D., Monk, R. M., and Needy, K. L., 1999, "A Procedure for Smooth Implementation of Activity Based Costing in Small Companies", Proceedings from the 1999 ASEM National Conference, American Society for Engineering Management, pp. 279-88.
2. Dr Pavlatos Odysseas, 2008, “Insights into factors affecting the adoption of ABC systems in the hospitality industry: evidence from Greece”, Department of Economics, University of Crete Panepistimioupoli Gallou, Rethimno, Greece
3. Roland Bardy and Al Hartgraves , ABC: pitfalls & problems – caveats & remedies. Is there a "transatlantic divide" ? , Goizueta Business School, Emory University, Atlanta, GA 30322
4. Kengo lighting company
http://www.kengo.com/ [accessed 20.3.2015]
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