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Large service organizations such as banks and hospitals used to be noted for their lack of standard costing systems and their relatively unsophisticated budgeting and control...

      

Large service organizations such as banks and hospitals used to be noted for their lack of
standard costing systems and their relatively unsophisticated budgeting and control systems
compared to the practice in large manufacturing organizations. But this is changing any
many large service organizations are now reversing their use of management accounting techniques.
Required:
a) Explain which features of large service organizations encourage the application of
activity-based approaches to the analysis of cost information.
b) Explain which features of service organizations may create problems for the application
of activity-based costing.
c) Explain the uses of activity-based cost information in service industries.

  

Answers


Kavungya
(a) Large – scale service organizations have a number of features that have been identified as
being necessary to drive significant benefits from the introduction of ABC:
i. They operate in a highly competitive environment
ii. They incur a large proportion of indirect costs that cannot be directly assigned to
specific cost objects.
iii. Products and consumers differ significantly in terms of consuming overhead resources.
iv. They market many different products and services.
Furthermore, many of the constraints imposed on manufacturing organizations, such as also having
to meet financial accounting stock valuation requirements, or a reluctance to change or scrap existing
systems, do not apply. Many services organizations have only recently implemented cost systems for
the first time. This has occurred at the same time as when the weaknesses of existing systems and the
benefits of ABC systems were being widely publicized. These conditions have provided a strong
measure for introducing ABC systems.

(b) The following may create problems for the application of ABC.
i. Facility sustaining costs (such as property rents etc) represent a significant
proportion of total costs and may only be avoidable if the organization ceases
business. It may be impossible to establish appropriate cost drivers
ii. It?s often difficult to define products where they are of an intangible
nature. Cost objects can therefore be difficult to specify;
iii. Many service organizations have not previously had a costing system and much of
the information required to set up an ABC system will be non-existent. Therefore
introducing ABC is likely to be expensive.

(c) The uses for ABC information for service industries are similar to those for manufacturing
organizations:
i. It leads to more accurate product costs as a basis for pricing decisions when cost plus
pricing methods are used;
ii. It results in more accurate product and customer profitability analysis
statements that provide a more appropriate basis for decision-making.
iii. ABC attaches costs to activities and identifies the cost drivers that cause the costs.
Thus ABC provides a better understanding of what causes costs and highlights
ways of performing activities more effectively by reducing cost driver transactions.
Costs can therefore be managed more effectively in the long term. Activities can be
analyzed into value added and non-value added activities alteration is drawn to areas
where there is a potential for cost reduction without reducing the products
service potentials to customers.
Kavungya answered the question on May 5, 2021 at 18:13


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