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Exactly how a costing system impacts corporate sustainability is a critical issue to consider since it is directly related to the success of the company’s activities, the applicability of its strategies, and the marketability of its services and products. The present work is aimed at comparing and contrasting three costing systems, namely: activity-based and life-cycle costing, as well as full cost accounting. It draws a parallel between the three, outlines the main strengths and weaknesses that each of the costing systems possesses, and applies the conceptual framework to my own organization.
Comparison and contrast
Activity-based costing is a method that attributes a price to each of the establishment’s activities based on how much is spent on them. In other words, the costs are derived from the consumption of resources, which helps the companies successfully and adequately determine how much a product or service would cost in its entirety or taken by element (Epstein & Buhovac, 2014).
Unlike the ABC system, which is output-based, life-cycle costing can be used to project the potential resource requirements and select the most cost-optimal supplies to minimize the expenses and remove wasteful steps. A simple table or a complex software-based analysis, life-cycle costing can be used to identify both external and internal costs pertaining to the product in question and monetize the social and environmental consequences of the said products (Epstein & Buhovac, 2014).
Both full-cost accounting and life-cycle costing deal with the social and environmental impacts of the products and services rendered. However, while life-cycle costing only sums up the monetary values of each service, full-cost accounting is set to integrate them into the costing paradigm. It is a method that relies heavily on managerial techniques in that it determines every fixed and variable cost (manufacture costs included) and calculates the overall price of the cost object, e.g., service or product. After the calculations, the method allows us to determine the total production and distribution costs of an output unit (Epstein & Buhovac, 2014).
Advantages and disadvantages
The main advantage of ABC is that it applies to both full-scope and partial views. It means that it can be perfectly usable where ineffective products and activities need to be determined. Because it controls costs on the levels of departments and per-product, it can be also used to single out what does not work and eliminate it (Finkler, 2014). However, the “sustenance” component is absent from this framework because the assignment of costs to anything other than services or products (e.g., the CEO’s salaries) can be complicated.
At this, life-cycle costing provides a more realistic revenue and cost assessment as it adopts a proactive approach to revenue generation and cost-cutting. In other words, as it tries to identify every aspect of costing (internal and external, present, and prospective), it is capable of tracking the cost impacts on every stage of the life-cycle. On the weaker side, because it is mainly oriented at the product’s lifespan, it does not assume that a drop in productivity is likely to occur after the product has been in service for some time (Finkler, 2014). While the services, when properly rendered, are unlikely to become less productive, a piece of equipment that wears out over the years can decrease the income.
Full-cost accounting has an important advantage over the activity-based costing in that it helps account for overhead costs – such as the CEO’s salary, as stated. In addition to determining costs according to the lifecycle, it can not only predict the future outlays but also provide a detailed account for the upfront investments and hidden costs. The main disadvantage of full-cost accounting is the time it takes to trace the many types of costs and align them with every output unit. Still, the functionality of the approach can outweigh the possible implementation issues (Finkler, 2014).
The scope within which my organization operates involves the preparation and execution of health insurance policies and procedures, general supervision, and continuous technical and clinical follow-ups over the shareholders involved. The organization functions so as to account for the interests of the stakeholders (mainly the insured) and allow them to exercise their right to quality healthcare.
My organization is well aware of the concept of externalities and the impact of our actions on society, which is why we measure our costs by looking both outwards and inwards. Life-cycle costing, therefore, appears to be the most optimal type of accounting for my organization as it helps to take into consideration every service- and product-related objects of expense in relation to the organization and the society.
Most organizations are not interested in the externalities as they do not seem to directly impact their operations – e.g., a chemical emitter is not much interested in the impact of emissions if it does not affect its performance (National Academy of Sciences, 2010). My organization, however, acknowledges the responsibility and makes decisions accordingly, regulating every action as per the impact it produces.
While not all external factors result in revenue losses and are generally susceptible to costing, life-cycle accounting allows for considering every possible externality within a short timeframe.
Epstein, M. J., & Buhovac, A. R. (2014). Making Sustainability Work (2nd ed.). Oakland, CA: Berrett-Koehler Publishers.
Finkler, S. A. (2014). Essentials of Cost Accounting for Health Care Organizations. Burlington, MA: Jones & Bartlett Learning,
National Academy of Sciences. (2010). Accounting for Health and Health Care: Approaches to Measuring the Sources and Costs of Their Improvement. Web.