Term Paper: Fixed Cost

Pages: 5 (1424 words)  ·  Bibliography Sources: 1+  ·  Level: Master's  ·  Topic: Business  ·  Buy This Paper

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[. . .] Characteristics of companies Benefiting from an ABC allocation System

Different types of company can benefit from ABC allocation system. First, a company producing two or more type of products can benefit from the ABC allocation system. "Arguably, product diversification has been a major contributing factor into the management accountant's pursuit of alternative costing devices like ABC." (Walther, 2012 p 18). In the contemporary business environment, many manufacturing companies are specializing in different type of products. However, ABC allocation system will assist this type company to identify which product out of all its products delivering the highest contributing margin. By allocating the costs system to different type of products produced in the company, a company will be able to understand which products to pursue and the products to drop. Companies such as Microsoft, Hewlett Packard, Samsung, and other companies that produce multiple products will benefit from implementing ABC cost allocation system.

Moreover, companies having different categories of customers can also benefit from ABC allocation system. In the present competitive business environment, organizations are increasingly searching for market in order to remain in business. Thus, many businesses specialize in supplying their products to different categories of customers, which include departmental stores, wholesalers, retailers and direct customers. Since a company will incur costs to supply its products to these types of customers, it is critical to use ABC cost system to determine the category of customer that a company will enjoy higher contributing margins.

Additionally, service companies can benefit from the ABC allocation system. Many service companies such as accounting companies, financial and banking companies and insurance companies offer different type of services to customers. For example, a bank such as Wells Fargo or Bank of America offer different type of banking services for their customers, which include loan service, mortgage service, bank account, and international banking service. Typically, the banks will need to incur cost of operations to pursue these banking operations, and it will not be appropriate to use traditional costing system for these types of operations. The ABC allocating system will be appropriate for this type of business operations because the ABC will assist the company to identify which type of service that the company will enjoy higher contributing margin. By assigning costs to different type of services delivered to customer, an organization will be able to understand the type of business that is more profitable.

Activity-based costing can also benefit a company operating in multiple countries or geographical regions. Many companies are operating in different countries to enjoy market advantages. If the company is using a traditional costing system for all its business operations across all the countries, the ABC allocation system will be beneficial for a multinational company because the costing system will assist the company to understand a country that is more productive.

Despite the benefits that an organization can enjoy from the implementation of ABC allocation system, an organization must use ABC allocation system with caution. Typically, the GAAP (General Accepted Accounting Principle) does not support ABC for external accounting reporting. Thus, an organization wishing to use ABC should only use it for internal purpose only and use the traditional costing system for the external reporting, which may make a company to incur lot of resources in implementing ABC. Garrison et al. (2008) argues that implementing ABC system requires substantial resources and ABC is more costly to maintain than the traditional costing system. Although, the ABC system assists a company to understand the costing system for products manufactured, however, the benefits of increased accuracy may not outweigh its costs. Despite the argument of Garrison et al. (2008) on the shortcoming of ABC, the use of ABC is increasingly popular among organizations due to its accuracy. The advent of sophisticated information technology has assisted an easy use of ABC system. Many vendors are now offering ABC software and template that enhance ease use of ABC system, which greatly reduce its costs of implementation.

Summary

Towels & More (T&M) is a small company specializing in producing towels and focusing on three types of customers: Department Store, Gift Store and Specialty Store. The report investigates the use of ABC… [END OF PREVIEW]

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https://www.essaytown.com/subjects/paper/fixed-cost/316506.