AccessMyLibrary provides FREE access to over 30 million articles from top publications available through your library.

Activity-based Costing for the Small Business: A Primer.

Business Horizons

| January 01, 2001 | Baxendale, Sidney J. | COPYRIGHT 2001 JAI Press, Inc. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan.  All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information)Copyright

If accurate product costing, more flexible capacity use, and better information for strategic planning and decision making appeal to you, ABC is the supplement to use with traditional accounting methods.

Understandably, entrepreneurs and owners of small firms are not likely to give much thought to an accounting system during the planning or implementation phases of their business. The business plan forces them to deal with pro forma financial statements that are properly integrated to assist bankers and venture capitalists in evaluating the venture.

Soon after start-up, however, these entrepreneurs and small business owners will be faced with the need for an accounting system to meet the ongoing information needs of the investors, the lenders, and the various authorities that will tax the income of the business. An accounting system that meets those needs is one that is governed, to a great extent, by the demands of the Financial Accounting Standards Board (FASB), in the case of information provided to investors and lenders, and by the Internal Revenue Service, in the case of information provided for income tax purposes.

Accounting systems designed to meet the needs of investors, lenders, and income taxing authorities often fail to provide the managerial accounting information necessary to operate the new venture. In particular, they do not provide the information needed to accomplish the very important tactical and strategic planning and decision making that will be critical to success.

Traditional Accounting Systems

The term "traditional' is used to describe the accounting system designed primarily to meet the needs of investors, lenders, and income tax authorities. Such a system is characterized by absorption costing. Absorption costing takes its name from the manner in which inventory is valued for reporting on the balance sheet and the cost of goods sold is valued for reporting in the income statement--in other words, the manner in which products "absorb" cost as they are manufactured.

It is based on the assumption that as a product is manufactured, it absorbs the costs of the direct materials that become a part of it, the labor used in making it, and the overhead costs associated with its production, which include depreciation on the machinery and the facilities, supervisory costs, heat and electricity, and many other costs related to operating the firm. The assumption behind absorption costing is that these expenses are necessary for the product to be manufactured, so each should attach itself to, or be absorbed by, the product being manufactured.

Related articles from newspapers, magazines, journals, and more
Absorption costing for decision-making.
Magazine article from: Management Accounting (British) Lucas, Mike October 1, 1997 700+ words
...primarily a product costing system--a more sophisticated absorption costing system, using a number of absorption bases (cost drivers...to particular customers, e.g. order processing and distribution costs. Finally, there are certain general overheads which...
Hayashi Construction, Inc.: a Business Method of Accounting Using Absorption...
Press release article from: Business Wire June 11, 2008 700+ words
...invention entitled "Accounting System for Absorption Costing." Absorption costing is an accounting system generally and widely...external income statement. Representative absorption costing is standard costing under absorption costing...
French distribution costs probed: study shows market polarising between...
Newspaper article from: Screen Digest May 1, 2008 700+ words
...was spent on distribution Average distribution costs of French films rose by 12.1 per...by technical costs in the average distribution costs is nearly 35 per cent, compared...2004). The 1m [euro] barrier for distribution costs was hit at 310 prints in 2006 (2004...
Northwest aligns its distribution costs with those of low-cost carriers;...
Press release article from: M2 Presswire August 24, 2004 700+ words
...NORTHWEST AIRLINES: Northwest aligns its distribution costs with those of low-cost carriers...announced steps to lower its domestic distribution costs by aligning them with those of the...compete with low-cost carriers on distribution costs, Northwest will reduce the amount...
Northwest Aligns Its Distribution Costs With Those of Low-Cost Carriers.
Press release article from: PR Newswire August 24, 2004 700+ words
...announced steps to lower its domestic distribution costs by aligning them with those of the...compete with low-cost carriers on distribution costs, Northwest will reduce the amount...lower Northwest's annual domestic distribution costs by approximately $70 million. Customers...
Disclosure may hike life insurance distribution costs; Term life's lower costs...
Magazine article from: Investment News May 16, 2005 700+ words
...obligations are likely to hike product distribution costs. One of the beneficiaries of higher distribution costs would be term life insurance...only factor that could drive up distribution costs over the next few years, according...
Delta taps Orbitz supplier link to reduce distribution costs.
Press release article from: M2 Presswire December 6, 2005 700+ words
...taps Orbitz supplier link to reduce distribution costs(C)1994-2005 M2 COMMUNICATIONS...Supplier Link technology to reduce its distribution costs. Introduced in August 2002, Orbitz...designed to assist airlines in lowering distribution costs. Supplier Link is a proven and scalable...
United Airlines Becomes Seventh Carrier to Reduce Distribution Costs Through...
Press release article from: PR Newswire October 4, 2004 700+ words
...Supplier Link technology to reduce its distribution costs as part of the company's ongoing...to aid suppliers in lowering their distribution costs, Supplier Link is a sophisticated...underway to help us reduce our sales and distribution costs," said John Tague, United's...
For more facts and information, see all results
©2009 Gale, a part of Cengage Learning. All rights reserved.
About us | FAQs | Contact us | Privacy policy | Terms and conditions
Other Gale sites: Encyclopedia.com | HighBeam Research | Acquire Content | Books & Authors | Goliath | MovieRetriever | Smart QandA