Management Accounting Essay Example | Topics and Well Written Essays - 1000 words - 1

Management Accounting - Essay Example This report would focus on one of the most used techniques of management accounting, Activity Based Costing and how this report method has changed over a period of time. Activity based costing has been one of the highly and most used management accounting technique and it has been further developed with the passage of time. Activity based management (ABM), time-driven ABC are further enhancements in ABC to make it more effective for the organizations that adapt it. Accounting has over the years been considered as a practice that is used to record and present the summary of all the transactions that occur in an organization. Accounting was considered a system that presented historical perspective and was not highly considered in the decision making (Brimson, 1991). However, management accounting and in particular activity based costing has changed the scenario and now accounting information is used by management to make important decisions to not only improve the profitability but to also improve the performances of the organizations. Activity based costing is a management accounting technique that allows the management to identify the costs that occur in the organization. This method allows the management to analyze and recognize areas where costs are high or unnecessary cost is incurred thus it helps the management to make decisions to reduce the costs. Therefore by implementing this system or method the management is able to control its overall operational costs to a certain extent (Armstrong, 2002). Organizations that are competing for prices and their profit margin is low (Cagwin, and Bouwman, 2002), implementing ABC could allow them to control their costs and thus reduce the prices of products or earn higher profits (Gosselin, 1997). Therefore an industry that is highly competitive would give them the edge to lower their prices. Although it has been identified that implementing ABC is beneficial for the organizations and it can have several benefits. Howev er on the other hand, ABC has its flaws and drawbacks and some of the major drawbacks of ABC are; a. Implementing activity based costing in a service industry is difficult (Startton, Desroches, Lawson, and Hatch, 2009). b. There are some costs that are shared between different departments, products, activities and therefore identifying the costs for each activity is difficult (Piper, and Walley, 1991). c. Activity based costing requires time and even if the organization hires an extra accountant to prepare and implement this costing system, then the individual needs support from each department or employees involved in different activities. d. The technique focuses on cost minimization rather than profit maximization (Hicks, 1992) So with the passage of time, organizations identified some of these abovementioned drawbacks while implementing activity based costing methods and then they changed their system or tried to modify how they implement ABC. Some organizations to improve the e fficiency and improve the use of ABC tried to enhance its role and used Activity Based Management (ABM) rather than Activity based costing (Collier, 2006). ABM offers the organizations in providing information that helps them in making important long term strategic decisions. ABM helps the organizations in understanding the impact of different costs and different decisions and at the same time it offers the