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ABC Assignment - Managerial Accounting |, Study notes of Management Accounting

abc articles Material Type: Notes; Class: Managerial Accounting; Subject: Accounting; University: Case Western Reserve University;

Typology: Study notes

2011/2012

Uploaded on 04/30/2012

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Andrew Buxbaum
17 February 2011
Professor Braun, Accounting 202
ABC Assignment
Key Points from Indianapolis Speeds Away
The public portion of government is not often associated with groundbreaking or cutting
edge business practices. However, Indianapolis has begun to implement activity based costing
and other techniques to make Indianapolis one of the most productive cities in the country.
Many aspects of their economy have improved, such as the decline in the amount of city debt
and the constant lowering of property tax. By using activity based costing, the city was able to
get a clearer idea of its cost drivers and able to figure out where they were spending too much
money and effort. For example, ABC helped determine that eight man pothole crews could be
cut down to five people, cutting the cost by twenty five percent. Also, accountants determined
that the city spent 252,000 dollars repairing a garbage vehicle which was worth 92,000 dollars
new. This mistake was caught by ABC. By being able to clearly evaluate jobs and cost objects,
Indianapolis has been thriving and profiting. In addition to making the government more
efficient, ABC can also help bring in contractors and other talent inside a city or an organization.
Since the costing systems in Indianapolis were so strong, outside executives and company’s
were willing to work with the city. While ABC has many positive aspects, it also has a few
negatives. ABC can be costly to implement and start up. The employees must be trained on how
to use such a system and new IT technologies must be developed to fit the new initiative.
These drawbacks can sometimes persuade some managers to leave their system unchanged.
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Andrew Buxbaum 17 February 2011 Professor Braun, Accounting 202 ABC Assignment Key Points from Indianapolis Speeds Away The public portion of government is not often associated with groundbreaking or cutting edge business practices. However, Indianapolis has begun to implement activity based costing and other techniques to make Indianapolis one of the most productive cities in the country. Many aspects of their economy have improved, such as the decline in the amount of city debt and the constant lowering of property tax. By using activity based costing, the city was able to get a clearer idea of its cost drivers and able to figure out where they were spending too much money and effort. For example, ABC helped determine that eight man pothole crews could be cut down to five people, cutting the cost by twenty five percent. Also, accountants determined that the city spent 252,000 dollars repairing a garbage vehicle which was worth 92,000 dollars new. This mistake was caught by ABC. By being able to clearly evaluate jobs and cost objects, Indianapolis has been thriving and profiting. In addition to making the government more efficient, ABC can also help bring in contractors and other talent inside a city or an organization. Since the costing systems in Indianapolis were so strong, outside executives and company’s were willing to work with the city. While ABC has many positive aspects, it also has a few negatives. ABC can be costly to implement and start up. The employees must be trained on how to use such a system and new IT technologies must be developed to fit the new initiative. These drawbacks can sometimes persuade some managers to leave their system unchanged.

Ultimately, the article speaks mostly to the usefulness of ABC, as it is accurate in allocating cost and can help the managers and accountants see how to make a city or business more efficient. Key Points to Kip Krumwiede’s Article Activity based costing has been a heated argument for many years since the early nineties. However, much has been learned as many businesses have begun to it try out and eventually adopt ABC as an official way of calculation the cost of specific jobs. The article basically assesses the ABC’s pros and cons while citing statistics about how many companies have tried or implemented the program. Some of the positive aspects associated with ABC included a reduction of cost distortion. Costing based on activity will report costs accurately and in a more specific manner than using a plant wide rate to cost the project based on averages. Also, ABC helps take costs and make them more accurate, which will in turn help decision making as a whole in the organization. Questions based on competition and efficiency can be answered much easier. In a recent survey, businesses who adopted ABC were very confident that the system helped them make cost related decisions in a more effective way. While ABC has many positives, some businesses feel they do not need it because it is too complicated for their needs. For example, businesses that sell products at prices determined solely by the market do not have much use for ABC, as they do not need the most accurate job cost. In addition, a company with little cost distortion, such as one which makes similar products, would have little incentive to completely change its accounting system. A change in the books for these companies would not prove useful or time-efficient. The company would have to begin new procedures and install new information systems, which would take time and money to

firm run smoothly. In conclusion, the strength of a company’s IT and MIS sectors plays an important role in a company’s decision to adopt ABC, something I had never thought of before. Through the articles, I found many different reasons to support the idea that implementing an ABC method was worth it. For instance, in the Krumwiede article, eighty nine percent of the companies who are using ABC said it was worth the setup costs and forty eight percent of them rated their costing system as good or excellent (the average for all companies is 28%). Through these statistics, I can tell that ABC will work for organizations if it is given a chance. If the company is skeptical from the onset, ABC will fail, as the company will not fully support the change. ABC must be a integrated into many facets of an organization to work to its full extent. While ABC can sometimes take a long time to fully implement and succeed with, it will help an organization in the long run, as it can accurately price jobs within an organization.

Works Cited “Indianapolis Speeds Away”, Journal of Business Strategy , May 1998, by Harvey Meyer "ABC Why it’s tried and how it succeeds," Management Accounting , April 1998, by Kip Krumwiede