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.
