Importance Of ABC Model Essay


Consider why was the paper written? Has it achieved its objective? Why should people read it today? What have you learned and how does it relate to whatever else you know.



Importance of ABC model

At the end of the 1980’s, the National Association of Accountants introduced a new technique of cost accounting called ABC (Activity-based Costing) Model that charges the indirect costs of an organization to the activities that results the costs to be incurred. This also distributes the activities costs to the products that encourage the activities to be performed. The relevance of the ABC model has been proved and their importance has been distributed among both the cost managers and academics (John Y. Lee.). The author wrote this paper because at a certain period of time, it was founded that traditional costing is not sufficient for the industries as it leads to either over-costing or under-costing.

Reasons for Implementing ABC model

Firstly, the Activity Based Costing (ABC) model helps in reducing the costs by giving meaningful information regarding the opportunities of reducing costs. Secondly, the ABC model of costing includes the preparation of the statement related to the activities of expenditure and also compares it with the corresponding addition of the values in order to know the activities that are required to be abolished or are required to be improved. Thirdly, the particular costing method guides the management accountant in the fixation of the price by providing various data and information regarding the cost of the service and / or the product (Horngren and Horngren). In addition to these, the specified model of costing makes the accounting managers enable to take decision regarding the activities of the firm should be done and completed within the organization or it should be subcontracted to an outside agency. Therefore, it can be said that the implementation of the ABC model helps in buying or making decision. Lastly, it can also be said that the ABC model helps in transfer pricing. Moreover, accurate information can be gathered through ABC model in order to evaluate the performance of the transferee and transferor divisions.


Concept of the paper

The particular paper is on “Implementing Activity-Based Costing”. Thus, this provided paper deals with the rationale of the ABC model, its scope, its definition and the role of the management accountant in implementing the ABC model. Therefore, it can be said that the particular paper indicates the definition of ABC model, its scope, importance and concept regarding its implementation in the cost management.

Understanding of concepts and reasoning

Among the concepts and reasoning of the implementation of the ABC model or approach, the concept regarding the planning of the implementation of the ABC approach, relation between the implementation of the ABC model and the behavioral change management have also been discussed. Moreover, the initial design of the particular system, differences between operational and strategic cost management, ABC project planning, customer profitability reporting, data collection, implementation of the final system, its successful usage and commercial software of ABC have also been discussed.

Critical Evaluation

Importance of implementation of ABC model

According to some of the researchers like - Eldenburg, Epstein and Lee the particular paper was written as the preface of the time feature into the ABC model has verified that it is currently drawing consideration and is experiencing the process of expansion for becoming more perfect and accurate. The objective of the implementation of the ABC model in the cost management is to establish that the superiority and effectiveness of the cost management have been improved. These qualities of the cost management can be attained by the proper allotment of the overhead costs to the goods along with the objective of identifying the costs of each unit. In addition to this, the allocation procedure will improve the base of information regarding product decisions and will also raise the reliability of cost information. Opined to Drury, the ABC approach helps in altering the products' profit margin and this information is also considered as a useful source of information at the time of evaluating the price-related decisions or keeps / drop decisions.

Achieved its objectives

The particular paper has achieved its objectives as the paper has explained all the details like the definition of ABC model, its importance, its perfect usage and methods of implementing this approach within the cost management.

People should implement ABC model because this approach helps in distinguishing between the patterns of cost behavior in terms of diversity, volume and events. This system also helps to distinguish the forces behind the overhead costs as cost drivers (Horngren). The implementation of the ABC model helps in emphasizing the problem areas. Thus, through the implementation of the ABC approach, the management’s attention and detailed analysis can take place easily. Therefore, it can also be said that people should read this paper in order to understand the importance of ABC system, its benefits as well as its disadvantages and the process of overcoming the challenges that are faced by the people during the implementation of ABC system.

Studying this paper make a big influence at that moment, thus all industries began to implement this during that period. As a result of this, both positive and negative results came into focus. Therefore, at present, the implementation of the ABC system is important for only those industries where there are various product complexities and several varieties of product, as this system uses transactional drivers or consumption to assign costs to activities. However, it has been found that the industries implementing ABC system faces various challenges like – communication, change management, training, executive management support and cultural acceptance. Therefore, it has been noted that nowadays many industries avoid the implementation of ABC system.

From this specific paper, I learned – the definition of the Activity-Based Costing (ABC), various approaches, its features, methods of implementing ABC system, its functional areas and its importance in the cost management.

In order to learn about the ABC approach, the other related modules of costing are equally important. The reason behind this is that the ABC approach is related with other modules of the course like marginal costing, absorption costing and process costing as understanding of these approaches help to distinguish between these approaches and ABC approach.


Drury, Colin. Management And Cost Accounting. Andover: Cengage Learning, 2012. Print.

Eldenburg, Leslie. Management Accounting. Milton, Qld.: John Wiley & Sons, 2011. Print.

Epstein, Marc J and John Y Lee. Advances In Management Accounting. Bingley, UK: Emerald, 2011. Print.

Horngren, Charles T and Charles T Horngren. Management Accounting. Toronto: Pearson Canada, 2012. Print.

Horngren, Charles T. Introduction To Management Accounting. Upper Saddle River, N.J.: Prentice Hall, 2011. Print.

John Y. Lee.,. Advances In Management Accounting. Emerald Group Pub, 2012. Print.

How to cite this essay: