The Application of Activity Based Costing System and Company’s Financial Performance

Abstract

In today’s business competitive manufacturing environment, direct labour costs have become insignificant portion of total product costs of products or services. Direct labour was being no longer a suitable base for assigning overhead to products or services. Therefore, traditional costing systems which allocate overhead by using a single cost driver with an allocation base of direct labour, or any single allocation base may seriously distort product costs. This will lead to bad management decisions which prevent better business performance. Instead, activity-based costing (ABC) is a new costing system which allocate overhead based on multiple cost drivers, hence improves the accuracy of product costs, and gives better opportunities for performance improvement. The problem of this study indicated that a majority of manufacturing companies still using the same traditional costing systems which provide inaccurate product cost; and ABC system is not being applied by many companies yet. Thus, the study aimed to examine the relationship between application of ABC system and financial performance. Archive costs data of one manufacturing company (“A” Company) were used to apply ABC system based on (Cooper’s two –stages model). The results showed that the application of ABC system in "A" Company determined products costs more accurately; reduces cost; and increases the profit of many products than existing costing system.