FBM Cost View

(Guzman, 2013) analyzed several integrated cost systems to drive profitability and
performance. One is the traditional costing system/functional based management system used
mainly in the past and now merely for financial reporting procedures. In a functional based
management system, direct costs are directly attributed to the cost objects. On the contrary,
indirect costs are typically allocated to each cost object using a single or a few volume-based
cost drivers (e.g. direct labor, machine hours or units of output). This type of costing system
was created when companies manufactured products with little variety and a predominant
proportion of direct costs; or when supporting activities and its accompanying indirect costs
were limited (Novicevic, 1999). However, because of automation, short product life cycles
and high products and services variety, most production and service environment have
changed. Therefore, the cost system that was adequate for homogeneous cost pools driven by
a single cost rate could now be given distorted signals about profitability and performance
when using volume-based allocation rates. The limitation of functional based management
system is that they are unable to allocate the indirect costs of many resources of a company in
an accurate way. Since indirect costs have become increasingly more important than direct
costs and those costs are not accurately attributed to the different activities and products,
functional based management systems are unable to estimate adequate cost information for
most organizations today (Newman, 1998) .

ABM Cost View

Activity-based management (ABM) can be defined as the entire set of actions that can be
taken on a better informed basis using ABC information. The aim is to achieve the same level
of output with lower costs (ACCA, 2015). In activity-based costing (ABC), costs are traced
to activities and then to products. As with functional-based costing, both direct tracing and
driver tracing are used; however, the role of driver tracing is significantly expanded by
identifying and using drivers unrelated to the volume of product produced (non-unit-based
drivers). Thus, activity-based cost assignments emphasize tracing over allocation; in fact, it
could be called tracing-intensive. The use of both unit-based and non-unit-based drivers
increases the accuracy of cost assignments and the over-all quality and relevance of cost
information. For example, consider assigning the costs of the activity moving raw materials
and partially finished goods from one point to another within a factory. The number of
moves required for a product is a much better measure of the products demand for the
material-handling activity than the number of units produced. In fact, the number of units
produced may have nothing to do with measuring products demands for material handling.
(A batch of 10 units could require as much material-handling activity as a batch of 100 units.)
Activity-based product costing tends to be flexible. Cost information is produced to support a
variety of managerial objectives, including the financial reporting objective. More
comprehensive product costing definitions are emphasized for better planning, controlling,
and decision making. For example, a more flexible accounting system, with its wealth of
information on costs, activities, and drivers, could act as an early warning system of ethical
problems (Hansen & Mowen, 2007)
Works Cited
ACCA. (2015, August 18). Activity-Based Management. Retrieved June 03, 2016, from accaglobal
Web site: http://www.accaglobal.com/an/en/student/exam-support-resources/professional-exams-
study-resources/p5/technical-articles/activity-based-management.html

Guzman, L. S. (2013). RECENT EVOLUTIONS IN COSTING SYSTEMS:A LITERATURE REVIEW OF TIME-

DRIVEN ACTIVITY BASED COSTING. Retrieved June 03, 2016, from lirias.kuleuven.be:
https://lirias.kuleuven.be/bitstream/123456789/313169/2/RBE_58_01_0034.pdf

Hansen, D. R., & Mowen, M. M. (2007). Mangerial Accounting. In M. Hansen, Managerial Accounting
(p. 49). Mason: Thomson Higher Education.

Newman, E. (1998). The cost of library services: Activity based costing in an Australian academic
library. The Journal of Academic Librarianship , 373-379.

Novicevic. (1999). Total Quality Mangement and Activity Based Costing. Philosophy and Sociology .