The Activity-Based Costing (abc)

The Activity-based Costing (ABC) method is the most famous management accounting technique of recent years. In order to better understand this method, it is necessary to know about how and why it has come about. When came to 1980s, ‘New Economy’ which was described by creation, fast-paced operations, informal practices and the entrepreneurial spirit of risk investment began to play an important role in the world’s stage (Burns&Vaivio, 2001). Johnson and Kaplan (1987) stated that in that time the information technology developed rapidly; globalization started to diffuse vigorously; domestic competition was fierce and the capabilities of enormously expanding information processing demanded urgently.

Under these circumstances, several deficiencies were found in the traditional costing systems First of all, the traditional costing systems tended to measure costs which were easily measured rather than those which had the significant effect (Baines.1992).Secondly, managers might be misled to make inadvisable decisions by the traditional costing system. Thirdly, the traditional costing system was insufficient flexible to adapt to complex production situations. Fourthly, based on the traditional cost system, it was used to prepare monthly performance reports, in company with variance analysis by firms. However different months would have different predicaments, last month’s experience did not make the difference on the current month’s problems. Last, when the traditional system could not provide useful and timely information for product costing and operational decisions, profit centre managers tended to look for other ways to make bigger benefits, ways excluded increasing sales, enhancing market share, innovating new techinques, etc(Wickramasinghe&Alawattage, 2007).

According to Kaplan and Cooper(1998), in the new period , greater requirements were being placed on costing system by firms and managers. Firstly, because of the external environments with investors, creditors, authorities, shareholders and regulators, costing system should estimate the inventory and measurement of the cost of goods sold for financial reporting. Secondly, in order to make internal management better understand and can easily improve the economics of their operations, costing system should evaluate the costs of activities, products, services and customers .Thirdly, for operators to make both strategic decisions and operational improvements, costing system should provide useful and timely cost information and feedback to them.