I do think that this case study with proposed solution will be useful to agricultural enterprises seeking to employ management accounting techniques. I do think so because the study has adopted the new and more efficient way of activity based method of costing products and cost allocation. This method of activity based costing mainly focuses on activities. The ABC method is critical in organizations decision making process. ABC method is an essential accounting equipment that disintegrates details of cost of an organization.
The point that the ABC method tries to emphasize is that if such details as this are disintegrated and provide to managers then the managers will be able to make more sound decisions pertaining the organizations costs. In the past managers have been inconvenienced by the fact of lack of such information. In this case study the proposed solution will be useful since the manager and the accounting department will be linked together. This linkage between the manager and the accounting department will be useful because the manager will acquire information that he previously lacked.ABC assigns cost to activities rather than to products or services.
This in turn enables resources and overhead cost to be more precisely designated to the products and services that utilize them. The ABC methods entails a lot of advantages to agricultural enterprises, to begin with this agricultural enterprises will be able to price their product more accurately due to the fact that the cost has been carefully examined hence providing the exact pricing of a product. Taking for example, using the traditional costing method, cost incurred by paying of workers salaries was $100 but using ABC method more specification is done.
In this case the salaries paid was $40 the person who cleaned the door. If the traditional costing method was to be used to reduce production cost then it would mean that salaries will have to be decreased but using ABC method the venture in which the cost was directed to is clear and hence the job of cleaning the door could be allocated to a fulltime employee with no extra cost hence reducing cost of production. ABC method is also used as a mirror of the activities taking place in the organization.
This is possible due to the fact that each and every process n the organization is scrutinized while gathering information to be used for the ABC method. This venture will advantage the enterprise in that unnecessary activities that don’t generate income and yet consume cost will be surfaced making it easy to eradicate misuse of resources. Some other advantages that the enterprise will acquire include a better understanding of overhead, better utilization of unit cost instead of the earlier method of total cost, wastage or non-value added activities will be surfaced.All this advantages will lead to the strengthening of the agricultural enterprise. Everything that has advantages has disadvantages and the activity based method is no exception.
The firs major disadvantage that is faced while implementing this method is the fact that too much time is wasted in the collection of data in that numerous data is gathered from numerous activities and this process consumes a lot of time. The enterprise must also have substantial resources in order to install the ABC system, this basically means that the ABC system is costly.Once this system is installed, it is still costly to maintain since numerous data has to be collected, checked and feed into the system.
Another disadvantage that could be incurred in Activity Based method is misinterpretation of data collected. Information gathered by ABC method should be carefully used especially when this information is being used for purposes of decision making. Before taking a step towards making a decision using information that has been gathered using ABC method manager should have an understanding of which activities are really relevant to the situation commending decision making.