 |
Business | Industries | Finance | Tax |
| Index: > A B C D E F G H I J K L M N O P Q R S T U V W X Y Z |
|
|||||
| First Prev [ 1 2 ] Next Last |
There are now at least three approaches: standard costing, activity-based costing (discussed here), and throughput accounting.
Costs were originally considered fixed (the term comes from a Latin root meaning "constant") which worked well for very small businesses. In larger organizations, some costs tend to remain the same even during busy periods, while others rise and fall with volume of work. A more convenient way of categorizing these costs is to define them as either fixed or variable. Fixed costs were associated with the business administration, and did not change during quiet or busy times. Variable costs were associated with productive work, and naturally rose and fell with business activity.
In the early twentieth century, as organizations began getting more complex, managers needed a simple way to make decisions about products and pricing. Since most costs at the time were variable, managers could simply total the variable costs for a product and use this as a rough guide for decision-making.
Standard costing took the idea further, by dividing the fixed costs by the number of items produced, and treating the result as if it were a variable cost. This enabled managers to effectively ignore the fixed costs, simplifying the decision process even more.
This method tended to slightly distort the resulting unit cost, but in mass-production industries that made one product line, and where the fixed costs were relatively low, the distortion was very minor.
As time went on, the practice of paying workers on a 'set-piece' basis changed in favour of paying on an hourly rate. This is because in a complex organization, an individual's work is very often dependent on someone else, and paying set-piece in that environment becomes unfair. Also organizations with a wide range of products or services have many tasks common to several finished items, making set-piece impractical. Fixed costs now tend to get allocated based on things like estimates of time spent, or percentage of resources used. At the same time, equipment has become more complex and specialized. As a result, modern companies tend to have very low truly variable costs (often limited to raw material, commissions or casual workers) and very high fixed costs (interest payments, salaries, insurance). The terms direct costs and indirect costs have replaced the variable/fixed terminology, to better reflect the way allocation of overhead is actually calculated.
One effect of the above is that the practice of allocating fixed costs has a far more distorting impact on unit cost figures than it ever used to have.
Activity-based costing (ABC) is costing by activities. In this case, activities are those regular actions performed inside a company. "Talking with customer regarding invoice questions" is an example of an activity performed inside most companies.
Accountants assign 100% of each employees time to the different activities performed inside a company (many will use surveys to have the workers themselves assign their time to the different activities). The accountant then can determine the total cost spent on each activity by summing up the percentage of each worker's salary spent on that activity.
Each product or service is produced and delivered via the activities performed in the company. The accountant can then assign the different activities to the different products using an appropriate allocation method.
A company can use the resulting activity cost data to determine where to focus their operational improvement efforts. For example, a job based manufacturer may find that a high percentage of their workers are spending their time trying to figure out a hastily written customer order. Via ABC, the accountants now have a dollar amount that will be associated with the activity of "Researching Customer Work Order Specifications". Senior management can now decide how much focus or money to budget for the resolutions of this process deficiency. The use of Activity Based Costing to manage a business is called Activity Based Management.
| Politics | Business | Finance |
 |
 |
 |
|