Discussion 5

Marconi is a Portuguese telecommunications company that encountered  problems with its ABC system. The company’s production managers felt  that 23% of the costs included in the system were common costs that  should not be allocated to products and that allocating these costs to  products was not only inaccurate, but also irrelevant to their  operational cost reduction efforts.

Throughout the 19th century and most of the 20th century, cost system  designs were simple and satisfactory. Typically, either one plant-wide  overhead cost pool or a number of departmental overhead cost pools were  used to assign overhead costs to products. Then conditions began to  change. As a percentage of total cost, direct labor began declining and  overhead began increasing. Many tasks previously done by direct laborers  were being performed by automated equipment—a component of overhead.  

Companies began creating new products and services at an  ever-accelerating rate that differed in volume, batch size, and  complexity. Managing and sustaining this product diversity required  investing in many more overhead resources, such as production schedulers  and product design engineers that had no obvious connection to direct  labor-hours or machine-hours. In this new environment, continuing to  rely exclusively on a limited number of overhead cost pools and  traditional allocation bases posed the risk that reported unit product  costs would be distorted and, therefore, misleading when used for  decision-making purposes.

Activity-based costing (ABC) is a costing method that is designed to  provide managers with cost information for strategic and other decisions  that potentially affect capacity and; therefore, “fixed” as well as  variable costs. Activity-based costing is ordinarily used as a  supplement to, rather than as a replacement for, a company’s usual  costing system (e.g., process costing or job order costing). Most  organizations that use activity-based costing have two costing  systems—the official costing system that is used for preparing external  financial reports and the activity-based costing system that is used for  internal decision-making and for managing activities.

In activity-based costing, an activity is any event that causes the consumption of overhead resources. An activity cost pool is a “bucket” in which costs are accumulated that relate to a single activity measure in the ABC system. An activity measure  is an allocation base in an activity-based costing system. The term  cost driver is also used to refer to an activity measure because the  activity measure should “drive” the cost being allocated. The two most  common types of activity measures are transaction drivers and duration  drivers. 

Transaction drivers are simple counts of the number of times an activity occurs, such as the number of bills sent out to customers. Duration drivers  measure the amount of time required to perform an activity, such as the  time spent preparing individual bills for customers. In general,  duration drivers are more accurate measures of resource consumption than  transaction drivers, but they take more effort to record. For that  reason, transaction drivers are often used in practice.

Source:
Garrison, R., Noreen, E., & Brewer, P. (2014). Managerial accounting (15th ed.). Columbus, OH: McGraw-Hill Education.
Unit Learning Outcomes
ULO 2. Compare and contrast activity-based costing (ABC) to other cost allocation methodologies. (CLO 1)
Directions
Initial Posting
Concerns over the application of the ABC approach at Marconi have  been raised by personnel, including some of the senior leadership team.  It is the opinion of some that this method of cost allocation does not  accurately reflect the cost of production and will lead to unnecessary  improvements that will ultimately result in the elimination of jobs. 

 As  a respected member of the leadership team, the Chief Executive Officer  (CEO) has tasked you with investigating the concerns expressed by some  of the employee and management officials.  You are expected to prepare a  position paper either defending the use of the ABC method or  recommending an alternative method of cost allocation. 

In order to  formulate your response, you will want to carefully consider the  problem, collect relevant data and information, examine the pros and  cons of cost allocation models being considered, and document your  recommendations using sound arguments that are well supported, properly  vetted, and logically presented. It is important that management  carefully consider any potential ethical implications associated with  their stated position. If there are any potential ethical concerns  associated with your position, they should be identified and discussed  in the final recommendation should be identified and discussed in the  final recommendation.

If you prepared your response in Word, please cut and paste it  directly into the discussion board so that everyone will not need to  first download your response, then open it to read it. There is  no minimum or maximum in terms of the word count; however, the response  should explicitly address all required components of this discussion  assignment. The document should be prepared consistent with the APA  writing style (6th edition) and reflect higher level cognitive processing (analysis, synthesis, and or evaluation).  
Peer Responses
It is important that you become comfortable receiving and giving  constructive criticisms, since this is an important component in one’s  professional growth and development and a core competency for leaders.  Students will be expected to read the initial posting of at least TWO  peers, and then provide thoughtful comments addressing the following:
a) Point out what you perceived to be the strengths of the initial posting along with supporting rationale.
b)  Identify specific opportunities for improvement with regard to the  content in the initial posting. Furthermore, you should provide  supporting rationale for your stated position, as well as concrete  suggestions and guidance intended to strengthen the effectiveness of the  content.
Peer responses should be typed directly into the discussion thread  and not attached to a posting. For these responses, should outside  sources be used to support the content within the postings, proper  in-text citations and correctly formatted references should be prepared  consistent with the APA (6th edition). The list of references should be  physically positioned at the end of the postings.