You are required to prepare a report about your findings from the literature research, and discuss how it has helped your understanding of your chosen topic. The report should cover the following:
a. An explanation of the selected management accounting topic.
b. An explanation of the purpose of the two studies and what research question(s) they set out to explore about the topic.
c. A discussion about the similarities and differences in the findings of the two studies.
d. Provide four (4) specific outcomes or lessons learned from the two studies’ research findings that will be useful for management accountants in Australian companies to learn from, and justify your answer [i.e. provide 2 outcomes from each study].
Explanation of activity-based costing (ABC) system
With the increasing speed of globalisation, all business organisations are focused towards raising their profits. Under such condition, when there is increase in sales revenue, the variable costs tend to rise as well. Hence, this has mandated the need for the organisations to select a suitable costing method having the ability of recording and analysing the business costs (Chenhall and Moers 2015). In the current modernisation era, many business organisations are using activity-based costing (ABC) system in order to identify and allocate costs. This is because the traditional costing systems fail to assist the organisations to cope up with the varying business environment. As a result, ABC system has evolved over time to assist the organisations in overcoming the loopholes inherent in traditional costing system so that effective business decisions could be undertaken.
ABC system enables the organisations in allocating indirect business costs effectively based on the activities for manufacturing the various products. ABC system could be applied to organisations involved in manufacturing various products (Christ and Burritt 2015). Moreover, the system helps the management of an organisation in identifying the costs and its related activities and accordingly, allocation could be made. The working procedure of the ABC system is distinctive in nature compared to traditional costing systems, as it takes into account machine hours as the base for cost allocation of the organisations. In this system, the nature of the activity is taken into account and then the organisation identifies the respective cost unit.
ABC system is an effective method of cost allocation to various cost drivers of the organisations, which would help in effective decision-making. The role of the ABC system is significant in setting the selling prices of the products, which are manufactured by the organisations. More precisely, in this system, the costs incurred are categorised based on short-term costs as well as long-term costs (Cooper, Ezzamel and Qu 2017). The short-term business costs are allocated basically based on the volume-related business cost drivers. For instance, few volume-related cost drivers include labour hours, machine hours and costs of direct materials. For long-term variable costs, the initial step is to detect and assess the nature of costs and their activities incurring the costs (Cooper 2017).
The objectives of the ABC system in a business environment are described briefly as follows:
- ABC system intends to rectify the deficiencies of the traditional costing method, which is associated with record of business cost (Hopper and Bui 2016).
- This system has the objective of enhancing cost allocation, which could be associated by relating the costs incurred by the organisation to its respective activities.
- The system concentrates on assisting the management of an organisation to undertake decisions appropriately about the business costs and decide the selling prices of the products (Dale and Plunkett 2017).
- ABC system leads to more suitable cost disclosures of the organisations and therefore, the cost structure could be improved further.
For effective evaluation of the ABC system, various research articles have been taken into consideration. Two articles are selected, which would assist in further explanation of the application and benefits of the system in an organisation. The articles selected are listed as follows:
Purpose of the two studies and research questions set out for topic exploration
Article 1: “Activity based costing (ABC) in the public sector: Benefits and challenges”
Article 2: “Activity Based Costing in Services Industry: A Conceptual Framework for Entrepreneurs”
The above two journals are focused on organisations functioning in different industries. These articles highlight and provide meaningful insights into the ABC system
Analysis of Article 1:
This journal article aims to show the difference between the traditional costing system and the ABC system at the time of application in business organisations. Moreover, it highlights the benefits related to the ABC system. Furthermore, the article reflects the implementation of the ABC system in a public sector organisation.
As per the research paper, the problem statement reveals the opinion of numerous academicians and researchers, in which they stated that the ABC system is useful in business organisations, which have large size and big operating scales or those organisations offering multiple products and services to the customers. However, Oseifuah (2014) cited that the ABC system is used more extensively than the initial portrayal. This research aims to consider a public listed organisation involved in offering services to the general public. These services are classified as overhead intensive and hence, the researcher believes that the ABC system is the best alternative for the sector.
According to the researcher, the implementation of ABC system would result in accountability and transparency of the organisation. The research is carried out by taking into account the public listed organisations having operations in South Africa and they are considered to be one of the essential backbones to service delivery in the nation. Therefore, the research intends to analyse the ways through which the implementation of ABC system could be enforced effectively in the public organisations operating in South Africa.
This journal paper describes the traditional costing method and the ways through which it could be applied in organisations. The traditional costing system is implemented and developed in organisations, which has either process costing or job costing method in place. The costs are apportioned and they are segregated based on products, which have direct costs and based on period having indirect expenses. The cost allocation is conducted based on the volume cost drivers, which might be the machine hours (Eldenburg et al. 2016). Moreover, the article sheds light on identifying the loopholes inherent in the traditional costing method.
The above-stated figure is extracted from the journal paper, which represents a comparative evaluation between traditional costing method and ABC system. Based on the evaluation included in research paper, the following research questions are formulated:
- How could the ABC system be implemented in public firms and how to identify the respective costs?
- Is it is possible to apply ABC system in other organisations having limited size and limited product lines?
- What advantages could be obtained by a public organisation by applying the ABC system?
Analysis of Article 1
Analysis of article 2:
According to this paper, the researchers have focused on service sector. It has been observed that both manufacturing and service organisations have managed to attain growth in the current periods. The researchers have detected that in the varying environment, the overall rise in operating scale leads to massive hike in costs related to business operations. Majority of the business organisations encounter problems to handle the profit levels and business costs (Frazier 2014). Hence, it has become necessary for the organisations to choose an effective system of cost management, which could reflect the costs incurred during the year correctly and appropriately.
The article sheds light on the different costing systems, which are utilised in a business environment and the ways through which they could be reported. Based on such reporting, the organisations could undertake suitable decisions. The paper critically explains the ABC system and the significant steps that the organisations follow to identify the cost elements and main cost drivers. Moreover, this paper would reveal the ways through which the ABC system and traditional costing system do not resemble each other (Onat, Anitsal and Anitsal 2014). Certain loopholes are inherent in traditional costing system, which include inability to consider non-financial factors impacting business operations and incorrect cost information. Therefore, this paper sets out the fact that traditional costing system is unsuitable for any organisation involved in the service sector. This automatically leads to the opinion of adopting the ABC system for effective cost treatment in the context of the service sector organisations. The researchers have discussed a number of benefits associated with the implementation of the ABC system in service organisations. This is because the system provides accurate depiction of business costs, cost minimisations, enhances product costing and assists in decision-making procedure of the organisations (Fullerton, Kennedy and Widener 2014).
Hence, the above discussion reflects the merits of the ABC system effectively compared to traditional costing method. The researchers have explicitly mentioned the benefits of the ABC system along with the reasons of implementing the same within the service sector organisations. The evaluation depicts the application of the ABC system from the business context. Therefore, the following research questions are framed based on the evaluation of the research paper:
- What contributions do the ABC systems make in undertaking useful decisions?
- What are the differences between an organisation using traditional costing system and one using the ABC system?
- What cost drivers are necessary for the service sector organisations?
After critical evaluation of the two studies, certain similarities and differences are inherent between them and they are described as follows:
- Both the research papers have focused on applying the ABC system in different industries and the ways through which it could fetch enhancements in their reporting framework. It has been analysed that the system would result in improvements and correct projections in relation to different types of costs (Langfield-Smith et al. 2017).
- Both the articles have focused on identifying the loopholes present in the traditional costing system and the ways through which the ABC system could be applied for eliminating these loopholes. Moreover, these articles have discussed the major differences between the ABC system and traditional costing system, as the former is deemed to provide certain business improvements.
- The benefits of the ABC system as a costing method are mentioned in both the research papers. Both papers have been focused on boosting the analysis with the advantages related to the ABC system.
- After evaluation of the two research papers, it is apparent that the organisations selected belong to different business sectors. This is identified as the major difference between the two papers, since the business structure and the cost items would be different for the organisations operating in different industrial sectors (Lavia López and Hiebl 2014). In the first article, public sector organisations are provided with utmost priority. On the other hand, the service sector organisations are emphasised in the second article.
- The organisations considered in both the articles are involved in providing diversified services and moreover, the nations where the organisations operate are not same. Instead, the organisations selected in the research papers belong to different nations.
The assessment of the two journal articles constructed above effectively depicts the benefits of the ABC system in business organisations. Certain positive outcomes are learnt from the analysis of the two papers, which could be advised to the management accountants working in the Australian organisations. Such knowledge would help them in making significant improvements in the business structures of their organisations (Messner 2016). The four specific outcomes learned from the research papers, which are deemed to be valuable for the Australian management accountants are enumerated as follows:
Analysis of Article 2
Advantages of the ABC system over the traditional costing system:
It has been identified that there are numerous Australian organisations that follow traditional costing system for cost allocation (Mitra 2016). This requires revision and the system needs to be substituted with the ABC system. The reason is that the ABC system could result in useful changes in the reporting framework followed by the Australian organisations (Noreen, Brewer and Garrison 2014). Hence, the organisations having business operations in Australia with large operational scales and multiple product lines are advised to adopt the ABC system for better cost allocation. Moreover, it is estimated that the adoption of this system could lead to improved reporting for all types of costs incurred by the business organisations (Otley 2016). Along with this, the papers evaluated highlight the deficiencies evident in the traditional costing system and the ways through which the implementation of the ABC system would help in dealing with those deficiencies. Furthermore, the assessment has identified few other issues related to the traditional costing system and hence, this mandates the need of replacing the same with the popular ABC system.
If the ABC system is implemented within the business organisations, it is believed that the cost structures would be efficient and accurate (Parker and Fleischman 2017). This could be identified as one of the significant benefits that the Australian organisations could obtain by implementing the ABC system. As a result, the decision-making process of the organisations could be enhanced further owing to the fact that the management would have all pertinent and correct cost information for a period, which would assist in undertaking decisions easily. Along with this, the costing method has a significant role to play while deciding the prices of different types of products and services offered by the business organisations (Plank 2018). The accurate cost outcomes depicted by the costing method are often lower and thus, it leads to minimisation of product and service costs incurred by the organisations.
Identification and apportionment of costs:
Even though the ABC system is gaining popularity with the passage of time, it needs to identify costs based on which cost allocation could be made (Subramaniam and Watson 2016). It is possible to conduct better cost allocation in the ABC system and it has the ability of mitigating the loopholes inherent in the traditional costing system. The ABC system could be applied to a service providing organisation, in accordance with the evaluation of the journal articles. The popular ABC system helps the business organisations in allocating costs based on the various activities conducted by the organisations for manufacturing products and rendering services. The cost presentation reflected in the ABC system contains greater reliability and hence, it is advised to the majority of the Australian business organisations to implement the system in their management accounting procedures (Tappura et al. 2015).
The research papers, taken into consideration for this report, focus on the usefulness of the ABC system in the context of the business organisations. The Australian organisations would seek numerous benefits from this system, since the management would be able to identify cost drivers as well as responsibility units in an effective manner (Weygandt, Kimmel and Kieso 2015). Moreover, the management of an organisation could identify the high-cost activities and unproductive overhead costs with the help of the system. Accordingly, it could devise out strategies for minimising such unproductive costs. Henceforth, the ABC system is deemed to be an useful cost management practice in the Australian organisations.
The above-mentioned outcomes are found to be the various positive outcomes after critical evaluation of the two chosen journal articles. The four outcomes discussed above could be considered by the Australian organisations for enhancing its reporting framework associated with its different types of business costs.
Based on the above discussion, it could be stated that the activity-based costing system is an improved tool over the traditional costing system in terms of cost allocation for the business organisations. This technique is estimated to become more popular over time, as numerous organisations would use it for recording their business costs. The report covers in-depth and critical evaluation of the two journal articles, in which organisations belonging to different industrial sectors are considered. It has been found that the application of activity-based costing system has brought success to those organisations.
The report has extracted certain positive outcomes and future scope based on which different research questions have been formulated. Along with this, the report takes into consideration comparative analysis of the outcomes obtained after critical assessment of the two selected journal articles. Moreover, it has covered the various similarities and differences between the outcomes obtained from the two articles. Finally, the significant outcomes obtained from the evaluation of the two journal articles are considered and these have been advised to the management accountants employed in Australian organisations. The primary intention is to improve the reporting framework or structure in terms of cost allocation for the business organisations. The cost presentation reflected in the ABC system contains greater reliability and hence, it is advised to the majority of the Australian business organisations to implement the system in their management accounting procedures
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