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1、Four short words sum up what has lifted most successful individuals above the crowd: a little bit more.-author-dateliterature-reviewLiterature reviewLiterature reviewThis literature review is mainly about the activity-based costing system and its application in a specific industrial company in china

2、. First the literature review will begin with the comparison between traditional costing system and activity-based costing system. Cost accounting can be judged as an effective system which can assume some useful information that related to organization or consuming resources. It also provides infor

3、mation about management and finical accounting. On one hand, cost accounting reflects the degree of cost accumulation for inventory. By evaluating inventory, the results can satisfy requirements of external reporting and internal profit measurement (Skoda. 2014). The market structure of the pharmace

4、utical industrial both has a multinational oligopolistic characteristics and a highly competitive feature. This industry can be seen as a oligopolistic industry mainly because there are small percentage of companies which are large and internationally accounted the bigger part of the market share. T

5、here are 100 largest companies occupied 90 percentage of the world sales. There is a pretty strict limitation to enter this industry. Once a company got a pattern on a product, other manufacturers can not enter the market for the patterned product for about 20 years. Besides, the entry is also limit

6、ed by the intensive marketing activities which are undertaken by whose innovative industries that want to make p their loyalty of the brand. Some small and just started companies may do not have enough resources to meet the large expenses; they also have difficulties to conquer a market position. Be

7、sides, the ability of the pharmaceutical companies to affect the price of the products, as a result of the patent system is pretty high. This is also having significant influence on the profit (Broekhof, 2002).In general, management controls in pharmaceutical industry refers to several aspects. It i

8、s related to the organization, policies and procedures which is used by agencies to ensure some issues. The management control should ensure the programs can achieve the intended goals of the company. Assignment in each department should be consistent with the resources. It is important to protect t

9、he programs and resources from the waste, fraud and mismanagement. Decision-making needs reliable and timely information. In pharmaceutical industry, most of the companies are trying to adopt the standard-cost method to measure the cost. This method has some advantages such as rationalization of cal

10、culation work. The variations are always from the normal and these variations also put on the account of the financial results of the company. This method is an efficient method especially in pharmaceutical industry. This method especially useful in analyze the of the production efficiency, which he

11、lps company accomplish an important function in the leadership of the modern enterprise (Sgardea, 2011). Management accounting is seen as an effective system which is related to the information that helps people within companies to make a better choice. Management accounting was developed throughout

12、 the 20th century. The main reason for this system is the demand for cost information about the products. It is clear to see the importance of cost information, in most cases; managers use them for decision making. Besides, some external users such as shareholders, creditors and tax officers are mor

13、e care about the income of the companies. Apart from provides useful cost information to managers, management accounting also have other functions. It can use the relevant cost information for planning, control and performance measurement. It also can allocate costs between costs of goods which have

14、 been sold and inventories. From a different perspective, cost accounting is also concerned with cost accumulation for inventory valuation. This literature review will focus on two types of costing system: Traditional costing system and activity-based costing system. The two costing systems are both

15、 allocate indirect costs to cost object. There is a need to find a proper cost allocation technique to allocate indirect costs to cost object, which can be achieved by the allocation base and cost driver. The working principles of the allocation base and cost driver is establish some consumption pat

16、tern between indirect cost and cost object. When the allocation base captures the relationship between the object and indirect cost, the cause-and effect allocation can be used. It is doubt about the suitability of traditional costing system (Skoda, et al, 2014). Activity-based costing system is a m

17、odel which was designed to remind managers to think about economics in the pat and future. The usage of this system is not only limited too past financial information. Variety kinds of data can be used for this model, such as budgeted, forecasted, targeted expenses or even quantity data can be used

18、in this system. This can use predict the expenses and some information about activity driver to predict the future spending for activities and resources. In this case, activity-based costing system has become a useful tool for budgeting expenses. There also exits a activity-based costing model. This

19、 model is depending on current and forecasted information. This model can determine whether past costing pattern is suitable for future (Skoda, et al, 2014). There are some reasons that increasingly managers try to adopt activity-based costing system as the main system. To begin with, the traditiona

20、l one has some disadvantages of allocating fixed overheads, such as distorted labor. Using a single pool of indirect costs and overhead application bases are longer satisfied the needs. Especially in current industrial companies, resources are always having less relation with direct labor. Such misa

21、llocations will cause wrong decision making. Industrial companies have two choices to maximize their profits. To begin with, cutting costs in the first solution, but this kind of method may cause lots of trouble. Second is correct price of products, which leads to arise of the activity-based costing

22、 system. Urgent requirement of cost information also is another factor that results in the emerging of activity-based costing system. Cost accounting systems can provides cost information to help upper managers to perform their duties. If the industrial company decides to reform their manufacturing

23、processes, what the managers want is to make accounting systems to keep up with this reform. Some signals that indicates the need to have a new costing system. Managers do not believe the cost of products which have been reported. Marketing personnel are not satisfied with reported product costs. Th

24、e most significant factor is sales of products are increasing while the profits of products are declining. Some products which are reported to have high profits are not sold by competitors. Overhead cost rates are become increasing and high. Product lines are becoming varies. Direct labor has occupi

25、ed a small percentage of the company. Some products are priced lower than the overall price in the market by competitors. The activity-based costing system has been widely used mainly because the following advantages. This system is much more useful in measuring costs of products. The pooling costs

26、which are caused by activities can provide information which can help managers make better and control of costs. When the activity-based costing is in use, an activity-based flexible budget would be developed. Such a flexible can produce more accurate budgets, mainly because multiple cost drivers ar

27、e used to explain the behavior of overhead costs. Besides, this system also has insight analysis of some issues which may affect profitability of a firm directly, such as customer profitability, distribution channels, region and some other related issues. Last but not the least, this system provides

28、 opportunities for products designers to reduce costs. This system may improve the ability to evaluate the cash flow. Through putting costs into activity pools separately and identify the cost driver into each pool, it would be possible to determine the levels of various costs more accurately. Some

29、problems would be arising when using this kinds of system. Activity-based costing system not covers the products which may have poor quality, poor design and less proportion of market share (Reyhanoglu, 2004). There are several methods to determining product combinations by using activity-based cost

30、ing system. To begin with, it is important to understand issues or activities. First, some issues that are related to production must be identified. These issues can improve the current processes. In a certain activity, it is important to determine whether the activity is value or non-value added, p

31、rimary or secondary, and required or not needed. If the output of the activity is directly related to customer requirements, it is a value-added activity. The main aim of this activity is to reduce non-value-added activities and wipe up those unnecessary. Second is trace costs to activities. In the

32、application of activity-based costing system, this step is also used to collect costs from activities which producing products for the company. These costs can be in various kinds of forms, it can be salaries, expenditures that used for research or development for company, machinery or even futures

33、in an office. Then these costs can be traced through analyzing activities and the gathered organizational inputs. These separate costs can be gathered together and get a total input cost for each activity. In this case, the only thing to do is find where the costs come from instead of calculating co

34、sts. The amount of time that the activity consumed depends on many factors, such as the size of a company, product mix and even the number of production activities. Next is identifying the constraints. Identifying which activities in each product are constrained. Constraint is a factor that will pre

35、vent or stop the company to achieve a certain goal. The constraint can be in various forms. It can be capacity. Changing and increasing the level of resources supply of the constraining activity can improve the capacity limit. If the constraint can be increased, it would be no longer a constraint. I

36、f there exits a capacity limit, bottlenecks must be pay a close attention to, and a special tool also need to maximize the bottlenecks. A bottleneck will be arising when there is a need for a resource in a short period of time, it would be exceed the ability of the company to deliver it. I order to

37、settle down constraints, the best solution is to use the theory of constraints to analysis. There is a hypothetical premise that production capacity is fixed and it can not be changed readily in a short time. However, there would be more and more variable costs in the long run, labor commitments bec

38、ome changeable. Due to these factors, there no longer exits a fixed cost. When the productive capacity is adjusted, the rest of the fixed cost also becomes changeable. In general, the concept of TOC and ABC are all focus on whether the capacity of the production capacity are increased or reduced. If

39、 there are no constraints, the opportunity cost is zero. Next step is analyzed the cost and benefit. The calculated activity unit costs and bills of activity are used to recognize candidates for improved the business processes. Recognizing of non-value added accounts also through this procedure. It

40、also allows providing the products or services with higher efficiency. Opportunity costs and resource utilization are also being taken into consideration. The thing that must keep in mind is optimize the combination of the product is suitable to use the unused capacities as much as possible. The las

41、t stage is to determine which one is the right product combination. From what analysis above, it is important to determine the every cost and benefit and record each change. Those changes are easily compared wit the previous one. The next cycle of the above activities will be in easier because almos

42、t information is obtained. Besides, those activities should be performed repeatedly in order to make more profits and meet the needs of customers (Tioanda, et al 1999). In general, they are two common systems to measure profitability of a company. Traditional costing system is likely to allocate ove

43、rheads to cost centre, which is similar to the department in an organization (Costa, 2013). According to JK Myers, he holds opinion that traditional costing system can not reflect the actual cost of a company, mainly because the main method of computing cost program was designed in the late 19th cen

44、tury early 20th century (Myers, 2011). One of the disadvantages of using traditional costing system is it does not consider indirect expenses directly recorded in the cost. Using this system, the calculation of indirect costs is carried out in accordance with the quantity measure. For example, alloc

45、ation of indirect cost depends on how many direct labor or machine hours are used. Despites main disadvantages, there also have some advantages of this system, the main benefit of this kind of costing system is its simplicity and it is easy to find statistics that are needed. This system are suitabl

46、e for those companies those have less proportion of indirect costs, products structure is single and the product cost information has no much influence on success of business. It is clear to see there exits some weaknesses in traditional costing system (Wouters, 2012). So it is urgent to produce a n

47、ew costing system, the new one can overcome disadvantages of traditional one, and can calculate costs more accurately, activity-based costing system is in this case. “Activity-based costing system is an approach to the costing and monitoring of activities which involves tracing resource consumption

48、and costing final outputs. Resources are assigned to activities, and activities to cost objects based on consumption estimates. The latter utilize cost drivers to attach activity costs to outputs.”(Karmarkar, 1990) activity-based costing system is widely considered as a good way to improve the tradi

49、tional one, the most merit of using this system is for decision-making purposes, it guide company to adjust according to the market change, such as whether they should still sell a product. It is also important to know how this system works; there are four steps to calculate costs of goods and services. First of all, determine which activities are related to the products of the products of the company, such as design of a product. Identify