Background of the Study
Small-to-medium size enterprises (SME) are operating under immense pressure in order to remain competitive within the current global economy. There are various strategies for the smaller enterprises or organizations for achieving efficient ways of market response, cost savings, and financial efficiency. These also include agreement regarding established supply chain management approaches and improved accounting structures. The key objective of the article is to present the foundation and method behind the ABC and to discover the benefits of using ABC over traditional accounting system within the SMEs.
The business environment, especially for the SMEs are changing frequently and the SMEs have to update their accounting systems often in order to stay competitive and to enhance their profitability. Activity-based costing (ABC) highlights that activities consume various resources of SMEs and driver costs. As a result, the SMEsadvancing the most from the ABC would be SMEs with a noteworthyquantity of overhead affecting to a variety of actions in providing goods or services towards the customers whose demands also differ time to time. In other words, if the SMEs have little or zero overhead cost and productions almost indistinguishable products demanding similar care for each product, the necessity for the ABC is negligible. This current study reviews various challenges including both managerial and technical associated with the activity-based costing (ABC) model.
Aims and Objectives of the Research
The key aim of the current study is to analyse the usages of both traditional accounting system and activity based accounting (ABC) in SME for justifying the most appropriate system for the SMEs.
Objectives of the Research
- To analyse the effectiveness of using traditional cost accounting (TCA) in SME
- To analyse the effectiveness of using activity based accounting (ABC) in SME
- To evaluate the benefits of using activity based accounting (ABC) in SME
- To evaluate the limitations of using activity based accounting (ABC) in SME
- To recommend various strategies for minimising limitations of using activity based accounting (ABC) in SME
- How effective the traditional cost accounting (TCA) system is for the SMEs?
- How effective the activity based accounting (ABC) is for the SMEs?
- What are the benefits of using activity based accounting (ABC) in SME?
- What are the limitations of using activity based accounting (ABC) in SME?
- What are the recommended strategies for minimising the limitations of using activity based accounting (ABC) in SME?
Activity based accounting (ABC) is procedural and while traditional cost accounting (TCA) is structural. ABC procedures drivers at numerous module levels while TCA normally practices an apportionment process constructed on capacity, and ABC recognizes that cost objects consume activities whereas TCA accepts that cost objects consume means.
The key steps of Activity based accounting (ABC) are as follows:
- Recognizingthe cost activities associated with the operations in SMEs
- Choosing the cost drivers based on cost allocation
- Identifying the indirect costs per cost allocation
- Approximating capacity per cost driver
- Calculating overhead rate per cost activity
- Allocating costs to products
There are various benefits of using Activity based accounting (ABC) over traditional cost accounting (TCA) in the SMEs. The ABC enables the financial managers to concern regarding the cause effect connection between distributions and expended resources, the accurateness of cost allocations, the suitability of cost and profit facts, and the ability to update the accounting systems. In addition, ABC offers greater provision for operational, financial, and strategic decision makings. The financial managers have the opportunity to integrate ABC more effectively into the planning processes and the budget.ABC has more improvised and sophisticated financial supports for strategic making any product or customer decisions.
Quantitative research methodology is required for fulfilling the current research as the procedure benefits completing the research by developing a relationship between the theories and numerical data based on traditional cost accounting (TCA), activity based accounting (ABC)and the preferred accounting system for the SMEs. Clear and concise objectives have been created for the research and the research will use positivism approach. The research will be formulated around deductive approach for exploring the accounting theories. Data collected for the research will not be influencedin order to manipulate the research outcome.
The current research will be moulded using descriptive design for interrelating with the research participants and the collected data. Secondary research is recommended for the current research and the secondary data will be collected from various secondary sources such as books, journals and websites, which must be updated and of reliable authors with valid arguments and evidences tailored to the current study regarding traditional cost accounting (TCA), activity based accounting (ABC) and the preferred accounting system for the SMEs.
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