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ABC Model and its Features

Discuss about the Excellence Of Activity Based Costing In Cost Calculation.

Activity Based Costing Model (ABC model) refers to a specific costing model that helps the business organizations in the identification of the costing activities and assigns them on each activity with resources to all the products and services. ABC model helps the business entities in the organizational costs (Estampe et al. 2013). The main objective of this report is to conduct an analysis and evaluation on the various aspects of ABC model for the organizational success. For the purpose of this report, Independence Australia is considered. Independence Australia is an Australian organization that provides services to the people with disability (independenceaustralia.com 2018). For this reason, it is considered as a major Australian social enterprise. Most of the manufacturing business entities tend to adopt the ABC model, but it is equally applicable in the service industry and this report sheds on this fact.

ABC model is considered as a major managerial accounting tool that helps the business organizations in tracing the overhead costs to the activities and then involves in the process to assign them to the cost objects. On another word, ABC model provides the organizations a way for allocating the indirect and overhead costs to the products and services (Charaf and Bescos 2013). There are three major focus areas of ABC model; that is the identification of activities, production process and process a job. The strategy of ABC model group these processes together with the similar processes into the cost pools that can be related to the activity cost drivers. The next process involves in the analysis and assignment of predetermined overhead rate and assigns it to the individual jobs or services. In spite of the fact that ABC model involved many steps in order to be completed, most of the business organizations prefer to adopt the strategy of ABC model due to its accurate way to assign the indirect costs (Prowle 2016).

In this aspect, it needs to be mentioned that there are some major features of ABC model and they are discussed below:

  • One of the major features of ABC model is that it helps the business organizations to identify the specific costs that the business entities want to allocate and it is considered as the most critical process under this costing model (Oseifuah 2018).
  • The creation of cost pools is the next major feature of ABC model. In this process, the major costs are allocated under the cost pool that can be directly related to the products and services of the companies (Mahal and Hossain 2015).
  • The presence of ABC model helps the business organizations in the creation of cost pools for those specific costs that are closely aligned with the products and services of the business organizations. For this reason, the organizations can obtain different cost pools for different products and services (Oseifuah 2018).
  • ABC model helps the business entities to measure the activity drivers with the help of the collection of data on the costing activities (Mahal and Hossain 2015).
  • Most importantly, the implementation of ABC model helps the management of the companies in the generation of report for the management of the companies (Oseifuah 2018).

For the achievement of the organizational goals and objectives, ABC model provides great assistance to the management of the companies. The mission, objectives and strategies of Independence Australia are discussed below:  

The mission of Independence Australia is to bring improvement in quality of life by providing the required resources, power and encouragement so that they can make the correct choice about their well-being and life style. For this reason, Independence Australia is considered as a major social enterprise in Australia (independenceaustralia.com 2018).

Aligning the ABC Model to the Goals and Strategies of Independence Australia

The major objective of this organization is to provide the people with the choice to live with disability or other personal needs. For this reason, the main aim of the company is to provide these people with all the required resources and other aspects so that they can live their lives in their own way (independenceaustralia.com 2018).  

Independence Australia has five major corporate strategies and they are discussed below:

  • The strategy of the company is to ensure individual customer focus with the help of supportive engagement and involvement (com 2018).
  • The next strategy is to be a partner of choice by offering empathetic, responsive and quality solutions.
  • Another major strategy is to influence positive thinking, policy and practice within and across the sector so that visible difference can be implemented (com 2018).
  • The next strategy is to leverage the social enterprise capabilities in order to support the core charitable purpose.
  • The last strategy is the implementation of effective governance to ensure the fulfillment of its core purposes (com 2018).

Large popularity of ABC model can be seen in the manufacturing organizations all over the world. However, the importance of ABC model in the service industry or organizations cannot be ignored. It needs to be mentioned that there is not any direct cost in the service provider companies, thus the majority portions of the costs are treated as overheads. In addition, these organizations do not hold stocks of their provided services as the services are produced at the time of delivery. For this reason, these companies can obtain some major benefits from the application of ABC model (Adioti and Valverde 2013). The same aspect can be seen in Independence Australia as the company is a service provider.

Costing activities, resources and cost objectives are the three major section of the ABC model. for Independence Australia, the resource section refers to the expenses of the different departments of the company like the cost centers. The examples of some of these departments are corporate office and other departments like human resources department, finance department and others (Stefano and Casarotto Filho 2013). The costs from these shared-service departments are computed by describing them on the basis of service departments, volume, associated costs and others. Thus, the management of Independence Australia can increase the future scope of cost allocation with the help of ABC model.

Under the process of ABC model, the management of Independence Australia is required to define all the business transactions of theirs so that they can be segregated into the activities with the help of this costing model. The next process involves in deterring the name of the activities and the time they have taken to be completed so that they can be placed in the costing model (Aldogan, Austill and Kocaku?la?h 2014).

In relation to the part related to the cost object, the company is required to segregate them into two parts under the ABC model. In the first section, the company will be required to make the computation of the different transaction costs involved with their services so that they can be placed in different kinds of services of the company (Popesko 2013). In this context, it needs to be mentioned that the company will be able to save cost on the process of their service generation with the help of ABC model as this model will provide the management of the company with all the required information about their costing activities.             

Recommendation

Some specific aspects are required to be there in Independence Australia for the effective implementation of ABC model. The following discussion shows the recommendations about them:

  • The support from the senior management and the board of directors of Independence Australia is one of the major success factors for the implementation of ABC model. For this reason, the recommendation for Independence Australia is to make sure that there is full support from the senior management and the board of directors so that the managers can get all the required resources for the correct implementation of ABC model. At the same time, the implementation of ABC model will appear to be an important fact for the employees and other staffs of the companies in case they observe the support from the senior management as well as board of directors of the company (Aldogan, Austill and Kocaku?la?h 2014).
  • Business organizations are required to take into consideration the fact that it is not the responsibility of the accounting department to ensure the correct implementation and run the ABC model as the cross-functional team of the company is accountable for all the aspects of ABC model. For this reason, the recommendation to Independence Australia is to develop a cross-functional team by taking members from all departments for the effective implementation and functioning of ABC model (Popesko 2013).

There are many alternatives of ABC model as the managerial accounting technique for Independence Australia and one of them is Budgetary Control. Budgetary control is a major management accounting technique in which the actual income and spending of the companies are compared with the budgeted income and sending so that any deficiencies in the planning and controlling process can be identified (Arnaboldi, Lapsley and Steccolini 2015). Independence Australian can be majorly beneficial from the implementation of budgetary control and the advantages are discussed below:

  • Well-defined plans are the roots of budget. In the presence of budgetary control, different departments of Independence Australia will be able to know the amount they are required to spend as per the income of the company (Dooren, Bouckaert and Halligan 2015).
  • The management of Independence Australia will be able to control the business costs and to eliminate the wastage of resources. This aspect will be majorly helpful to increase the efficiency of the company (Arnaboldi, Lapsley and Steccolini 2015).
  • The management of Independence Australia will be able to develop effective financial strategy in case the actual expenses of the company exceed the budgeted expenses.
  • With the implementation of budgetary control, the management of the company will be able in establish coordination between different departments as the cross-functional team will consist of members from different departments (Dooren, Bouckaert and Halligan 2015).  

Conclusion

From the above discussion, one aspect is clear that ABC model will be majorly helpful in developing an efficient costing model for Independence Australia as the management of the company will be able in controlling various costs of their businesses with the help of this costing model. Apart from this, this costing system will deliver the required costing information to the managers so that they can make correct business decisions. However, the support from the senior management is required for the company along with the development of cross-functional team for the correct implementation of ABC model. However, it can be seen from the above discussion that the management of Independence Australia can adopt budgetary control as the alternative managerial accounting technique.

References

Adioti, A.A. and Valverde, R., 2013. Time-driven activity based costing for the improvement of it service operations. International Journal of Business and Management, 9(1), p.109.

Aldogan, M., Austill, A.D. and Kocaku?la?h, M.C., 2014. The excellence of activity-based costing in cost calculation: case study of a private hospital in Turkey. Journal of Health Care Finance, 41(1).

Arnaboldi, M., Lapsley, I. and Steccolini, I., 2015. Performance management in the public sector: The ultimate challenge. Financial Accountability & Management, 31(1), pp.1-22.

Australia, I. (2018). About Us . [online] Independenceaustralia.com. Available at: https://www.independenceaustralia.com/about-us [Accessed 23 May 2018].

Australia, I. (2018). Statement of purpose . [online] Independenceaustralia.com. Available at: https://www.independenceaustralia.com/about-us/corporate-snapshot/statement-of-purpose [Accessed 23 May 2018].

Australia, I. (2018). Strategic Plan 2015-18. [online] Issuu. Available at: https://issuu.com/independenceaust/docs/ia_strategicplan_2015-18 [Accessed 23 May 2018].

Charaf, K. and Bescos, P.L., 2013. The role of organizational and cultural factors in the adoption of Activity-Based Costing: The case of Moroccan firms. Accounting and Management Information Systems, 12(1), p.4.

Estampe, D., Lamouri, S., Paris, J.L. and Brahim-Djelloul, S., 2013. A framework for analysing supply chain performance evaluation models. International Journal of Production Economics, 142(2), pp.247-258.

Mahal, I. and Hossain, A., 2015. Activity-Based Costing (ABC)–An Effective Tool for Better Management. Research Journal of Finance and Accounting, 6(4), pp.66-74.

Oseifuah, E.K., 2018. Activity based costing (ABC) in the public sector: benefits and challenges. Management, 12, pp.4-2.

Popesko, B., 2013. Specifics of the activity-based costing applications in hospital management. International Journal of Collaborative Research on Internal Medicine & Public Health, 5(3).

Prowle, M., 2016. The changing public sector: a practical management guide. Gower.

Stefano, N.M. and Casarotto Filho, N., 2013. Activity-based costing in services: literature bibliometric review. SpringerPlus, 2(1), p.80.

Van Dooren, W., Bouckaert, G. and Halligan, J., 2015. Performance management in the public sector. Routledge. 

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