Activity-Based Product Costing and Ethical Behavior

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Table of Contents

Increasing product costing accuracy
Unethical behavior displayed by Chuck Davis
Chuck is not informed about Activity-Based-Costing (ABC)
Conclusion
Reference List

Increasing product costing accuracy

From the case study, Chuck Davis is of the opinion that there is no way through which accuracy of product costing can be increased. However, Chuck’s opinion is wrong. This arises from the fact that product costing accuracy can be increased through incorporation of activity-based costing.

According to Hansen and Mowen (2006, p. 139), activity-based costing enables a firm’s management teams to realize fixed overhead costs incurred in the production process vary as a result of other factors other than the firm’s production volume.

The advice Chuck Davis gives to Leonard depicts that he does not have sufficient knowledge regarding what causes product cost to decrease or increase. Hansen and Mowen (2006, p. 139) are of the opinion that a firm’s management team can trace these causes to individual products.

Through incorporation of activity-based costing, the management team can be able to establish the existing cause-and-effect relationship.

In addition, incorporation of activity-based-costing can enable the management team to understand the underlying behavior in relation to the costs which it incurs. The resultant effect is an increment in the efficiency with which the firm’s management team makes decisions on how to minimize cost.

Unethical behavior displayed by Chuck Davis

Chuck is the firm’s management accountant. Management accountants are supposed to give advice to the firm’s management team. The advice given forms the basis upon which the management team makes various operational decisions.

In order to achieve this, management accountants are required to adhere to general accepted accounting standards. Accountants are required to display certain codes of conduct. One of these codes entails competence. The code stipulates that accountants should not accept to undertake tasks which they are not competent in.

In this case competence encompasses knowledge, skills and experience regarding the task. This arises from the fact that acceptance of such tasks can result into lack of proficiency.

Despite Chuck claiming that the firm is effectively controlling costs through adoption of normal job costing, Chuck is not conversant with the limitations associated with normal job costing.

However, Chuck does not have sufficient accounting knowledge. As a result, his advice to Leonard is inefficient. This can make the firm to incur significant financial losses.

Chuck is not informed about Activity-Based-Costing (ABC)

From the conversation, Chuck refers to activity drivers as an accounting buzz word which refers to production volume. ABC is an efficient method of controlling product cost. Chuck relies on traditional methods of costing which entails allocating indirect and direct product costs on the basis of the volume produced.

This means that Chuck relies on drivers such as machine hours, labor hours, and material dollars. However, he does not appreciate the fact volume-based cost is inefficient. This arises from the fact that volume-based cost drivers distort product cost if the volume of resources consumed is not proportionate.

According to Terrance and Bernrd (1994, p.1), the concept of ABC has been widely accepted in the manufacturing sector as one of the most effective methods through which a firm can assign product costs. This arises from the numerous benefits, associated with ABC.

According to Jackson, Sawyers and Jenkins (2008, p.170), activity-based costing enables firm’s management teams to be more accurate. This arises from the fact that it provides accurate cost information which is a key consideration in the process of a firm undertaking continuous improvement.

Management teams highly rely on ABC system in undertaking various management functions such as planning and controlling which are conducted on a daily basis.

As a result of incorporating the ABC system, a firm is able to increase accuracy of costing. This arises from the fact that the management team is able to trace costs which are considered to be indirect as a result of utilizing the concept of volume-based costing to specific activities through incorporation of cost drivers.

Jackson, Sawyers and Jenkins (2008, p.170), are of the opinion that ABC system increases cost control within a firm. Therefore, Chuck’s assertion of the concept of ABC depicts that he is not informed regarding ABC. In addition, Chuck is not conversant with cost drivers.

This is evident in that Chuck adheres to normal job costing as the most effective ways to control product costs in the firm. He ignores cost drivers which are key determinants in the cost of a product.

Conclusion

From the above analysis, it is evident that it is possible to increase the accuracy of product costing. This can be achieved through integration of activity-based-costing in the firm’s management accounting practices.

To achieve this, it is paramount for firm’s management team to ensure that their management accountants are conversant with all the accounting concepts.

In addition, management accountants should be ethical in the process of executing their duties. One of the ways through which they can attain this is by adhering to accounting standards such as ensuring that they are competent with their tasks.

Reference List

Hansen, D. & Mowen, M.(2006). Managerial accounting. New York: Cengage Learning.

Jackson, S., Sawyers, R. & Jenkins, G. (2008). Managerial accounting: a focus on ethical decision making. New York: Cengage Learning.

Terrance, P. & Bernard, L. (1994). Implementing activity-based costing (ABC) in logistics. Journal of Business Logistics. New York: BNET.

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