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Business Management Techniques

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Costing accuracy is the main advantage of this type of activity. Companies allocate cost simply to the products that involve production activities. Hence this activity helps in eliminating allocation of costs that are irrelevant to the product. Other benefits of this type of activity to the business include an easy understanding of cost for inside administration, the potentiality to facilitate benchmarking and a better appreciative of overhead costs. This system of costing also supports the management performance and the scorecard. Besides these, this type of costing does integrate well with programs put in place for continuous improvements by the company.This method is widely used by companies in allocating its cost, the challenging part is the implementation. Putting into practice this kind of costing system within a company involves considerable resources. This can be a disadvantage for businesses with inadequate funds. Another challenge of using this costing method is that it can be misinterpreted. Based on our scenario of production of manual and automatic data, we can identify various issues arising. For instance a decrease in production volume from 1500 to 500, the cost of direct material increased from €20@unit to €30@unit, a clear indicator that the costing of this is very accurate. Under the activity based production analysis of the company, we can see differences in the packaging and delivery cost. The differences that occur between the packaging and delivery is due to activity-based costing…. This means that this system of costing is inaccurate in relation to increasing over head cost. This has made Activity based costing to become an alternative replacement to the traditional method in allocation of cost (Drury, 70). Advantages of Activity based costing Costing accuracy is the main advantage of this type of activity. Companies allocate cost simply to the products that involve production activities. Hence this activity helps in eliminating allocation of costs that are irrelevant to the product. Other benefits of this type of activity to the business include easy understanding of cost for inside administration, the potentiality to facilitate benchmarking and a better appreciative of overhead costs. This system of costing also supports the management performance and the scorecard. Besides these, this type of costing does integrate well with programs put in place for continuous improvements by the company (Drury, 120). Although this method is widely used by companies in allocating its cost, the challenging part is the implementation. Putting into practice this kind of costing system within a company involves considerable resources. This can be a disadvantage for businesses with inadequate funds. Another challenge of using this costing method is that it can be misinterpreted. Based on our scenario of production of manual and automatic data, we can identify various issues arising. For instance a decrease in production volume from 1500 to 500, the cost of direct material increased from €20@unit to €30@unit, a clear indicator that the costing of this is very accurate. Under the activity based production analysis of the company, we can see differences in the packaging and delivery