Research Journal of Finance and Accounting www.iiste.org ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol.6, No.4, 2015 66 Activity-Based Costing (ABC) – An Effective Tool for Better Management Ishter Mahal 1 Md. Akram Hossain, Ph D 2* 1.Assistant Professor, Department of Accounting & Information Systems (AIS), University of Dhaka, Dhaka, Bangladesh 2.Associate Professor, Department of Management Information Systems (MIS), University of Dhaka, Dhaka - 1000, Bangladesh *akram@du.ac.bd ABSTRACT Activity-based Costing (ABC) is a powerful tool for the an organization to have an accurate and effective cost for its product avoiding cost distortion that may lead sustainable development and growth which is mandatory to be competitive in the era of globalization and complex business environment. The article contains some brief description of international journals on ABC. Author has tried to bring up the main essence of these journals. The mentioned journals cover a wide range of topics from theoretical aspects of ABC to its application. Author has discussed some specific cases in different countries. Some of our journals highlight the impact of ABC on the European firms where as some other has tried to discuss the American context of ABC. Analysis contains some data on the Nestle Bangladesh Ltd. which maintains the ABC. We have tried to analyze how successful the company is in implementing ABC. In the analysis of journals, author focused on different era of business like service sector, technology business, manufacturing sector and many more. Implementing ABC in these different sectors is a little bit different. ABC has to be implemented considering the characteristics of that sector. In total ABC has been proved to be successful for almost all the sectors. There have been some modifications in ABC also. Some other concepts have also been discussed here like theory of constraints, time driven ABC and many more. Keywords: ABC, management accounting, manufacturing sector, time driven ABC. 1.0 INTRODUCTION Management accounting is well recognized as a tool to assist managers to make decisions, formulate plans and operate controls. Dynamic changes in business environment and vigorous global competition rectified some shortcomings of traditional management accounting system (MAS) in terms of validity, completeness, consistency, relevance and understanding creating a demand for modern management accounting tools such as Activity based Management, Activity based Costing, Activity based Budgeting, Benchmarking, Balance scorecard, Total Quality Management etc. Activity-based costing (ABC) was developed and has been advocated as a means of overcoming the systematic distortions of traditional cost accounting and for bringing relevance back to managerial accounting. A traditional system reports what money is spent on and by whom, but fails to report the cost of activities and processes (Miller 1996). Many organizations in the manufacturing industry have adopted the new costing method. Aranoff et al (1998) said that there are two purposes of activity-based costing. The first purpose is to prevent cost distortion. Cost distortion occurs because traditional costing combines all indirect costs into a single cost pool. Cost distortion is prevented in ABC by adopting multiple cost pools (activities) and cost drivers. The second purpose is to minimize waste or non-value-adding activities by providing a process view. Activity Based Costing is motivated by a belief that traditional (general ledger) accounting information is all but useless to managers who are interested in evaluating the effectiveness of resource allocation decisions in their companies. This traditional information is geared instead toward satisfying auditors or other outsiders who are interested in some evidence of financial accountability. 2.0 LITERATURE REVIEW For this article author analyzed related reputed studies and a trial is done to summarize the findings of those studies under specific head concerning the relationship between ABC & different recent issues such as Total Quality Management (TQM), Theory of Constrain (TOC), Activity Based Budgeting (ABB), Supply Chain Costing and the role of ABC as a business tool e.g. as a pricing tool, role in manufacturing concern, role in E- business, role in preparing financial budget etc. Analysis of ABC & Theory of Constraints According to Robert Kee and Charles Schimidt (1997) traditional cost accounting system has two major alternatives – ABC and theory of constraints (TOC). Theory of constraints is suggested for long run. The paper has developed a general model between these two extreme approaches. Sometimes neither theory of constraints nor ABC may lead to an optimal product mix. This general model may be used to modify theory of constraints or