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You are recently employed as a graduate consultant in a management consultancy firm. One of your firm’s clients is currently evaluating its budgeting system. The CEO of your client had recently attended a seminar on Time-Driven Activity-Based Costing (TDABC) in private organisations and would like to know whether the TDABC is suitable to the company. Your manager has asked you to prepare a report for the client.

Required:

You are required to prepare a report to comment on the suitability of the TDABC for a company of your choice (your firm’s client). The report should cover the followings:

a) A description of your firm’s client
b) A description of the TDABC and its features
c) In what ways TDABC is different from Activity-Based Costing and traditional costing systems
d) A discussion on whether the TDABC is suitable to your firm’s client.

Adelaide Brighton Cement

In this particular report, Time-Driven Activity-Based Costing System (TDABC) is discussed from the viewpoint of a consultant recently employed in a firm. Therefore, it is assumed that one of the major clients of the firm is Adelaide Brighton Cement, which is one of the top manufacturing organisations of Australia. The first segment of the report would focus on the business operations of Adelaide Brighton Cement. The second portion deals with describing the concept and features of TDABC. The third section of the report focuses on assessing the differences among TDABC, activity-based costing and traditional costing systems. Finally, the report would shed light on whether TDABC is appropriate for implementing in the stated organisation.

Adelaide Brighton Cement is a manufacturer of lime, cement and dry blended products in Australia. The broad operational base helps in prompt supply to the customers, which allows the strategic production capacity balance for meeting demand across the country. As a result, it enables in offering supply package flexibly supported with storage, transportation and supply logistics for locations across Asia and Australia.

The organisation operates within lime and cement division of Adelaide Brighton Limited having over 1,600 staffs in all the states and territories of the nation (Adelaidebrighton.com.au 2017). The diverse operational ability of the organisation has helped in offering turnkey solutions for assuring the basic goal of exceeding the consumer expectations. The organisation has been established in 1882 and it is an S&P/ASX 100 firm with primary activities constituting of the production of cement, clinker and lime products, concrete masonry products, premixed concrete and aggregates.

Several problems are inherent in the traditional costing system. In order to cover these shortcomings, time-driven activity-based costing system has been implemented, which is cheaper, simpler and excessively powerful compared to the conventional ABC system. As pointed out by Baiman (2014), the costing process could be simplified with the help of TDABC model. This is carried out to eliminate the requirement for interviewing and surveying workers for distributing resource costs to activities before they are driven to objects of cost. The orders, products and customers are included in these objects of cost.

This model enables in assigning the resource costs directly to the cost objects. This is carried out with the help of an elegant framework that needs two groups of estimates, which could be obtained without much difficulty (Bhimani et al. 2017). Hence, TDABC has the following features:

  • Firstly, TDABC computes the cost of supplying resource capacity. For example, a department could be considered, which is managing customer orders. In this method, the computation of the cost of supervision, equipment cost, cost of resource personnel, occupancy cost and technology handed over to the department.It divides the overall cost by the capacity of time available from the staffs carrying out the work of department for arriving at the cost capacity rate.
  • Secondly, TDABC is involved in using the capacity cost rate for driving the resource costs of the department to cost objects by anticipating the demand for resource capacity needed on the part of each cost object. By considering the above-stated department, TDABC needs an estimate of the time needed for processing a specific customer order (Braun et al.2014). However, this model does not need all the customer orders to be identical. With the help of this model, time estimate changes depending on specified demands by specified orders. Thus, this model simulates the actual processes used in performing work throughout an organisation. It could capture greater variation and complexities in contrast to a conventional ABC model without forming exploding demand for data estimates, processing or storage capabilities (Butler and Ghosh 2015). Hence, with the help of TDABC, an organisation could embrace complexity, instead of being compelled for using inaccurate and simplified ABC models of its complicated businesses.

Both activity-based costing and time-driven activity-based costing systems were founded in 1980 and Robert Kaplan is the founder of both the systems. The main reason identified behind introducing these models is that the traditional costing system fails to allocate overhead effectively and identify the profitable customers (Crosson and Needles 2013). In addition, gauging the cost of an activity is a significant function of an organisation. However, both ABC and TDABC models possess the ability to compute customer profitability. This would help in benefitting all the organisations by obtaining accurate and reliable information through recognition of the cost drivers. Some of these cost drivers include:

  • The quantity drivers, which are least accurate and least expensive
  • The duration drivers, which are medium for both
  • The intensity driver, which is most accurate and most expensive

Business Operations of Adelaide Brighton Cement

Hence, the major points of dissimilarities between traditional costing, ABC and TDABC systems are enumerated briefly as follows:

Traditional costing system:

There are many manufacturing firms that use the traditional costing system in the recent era. This is because manufacturing overhead could be allocated to the total production level. However, an assumption is made that the basic cost driver is the volume metric pertaining to manufacturing overhead and the users of the system make this assumption. The manufacturing expenses are allocated to products only and such allocation is made on the part of the accountants. However, non-manufacturing expenses are not associated with production and such expenses might be in the form of administrative expenses. This costing system is used mainly for outside financial reports, since the value of the cost of goods sold would be increased.

In addition, traditional costing is an outdated costing system in most organisations, since those manufacturing organisations are now involved in using computers and machines for much of their production (Edmonds et al. 2016). The machines and computers make the system outdated, since it is involved in using direct labour hours for computing cost. This leads to improper assignment of cost, since direct labour hours is not an effective cost driver for usage. This is because the other cost drivers are negated under this method, which might be taken into account for the cost of a product. Moreover, using this system might result in poor management decisions, since it does not include certain non-manufacturing costs.

Activity-based costing (ABC) system:

In the words of Epure (2016), activity-based costing helps in providing an accurate picture of the product cost; however, this could be used in the form of supplemental costing method on the part of the companies. However, the allocation bases are not similar for ABC system, as they are in traditional costing system. Along with this, the ABC system determines every activity associated with the production level and distribution of activity cost. The cost apportioned to the activity is then apportioned to the products needing the activity for production.

The greater accuracy of costing could be identified as the primary benefit of this system. The organisations apportion cost only to the products requiring the production activity. This system eradicates apportioning irrelevant product costs. Some of the main advantages associated with the ABC system include easy analysis of cost related to the internal management, capability in allowing benchmarking and greater cost understanding pertaining to overhead. The implementation of ABC system within an organisation needs considerable resources. However, this could be a demerit for the organisations having limited funds (Garrison et al. 2015). Lastly, there could be misinterpretation of information on the part of some users.

TDABC: Concept and Features

Time-driven activity-based costing (TDABC) system:

TDABC system is a significant advancement over the primary ABC model. This is because this specific system possesses the following characteristics:

  • This system is able to work in combination with enterprise resource planning or system of relationship management (Guinea 2017).
  • It could manage greater amount of transactions with a fast processing time using the system of ERP.
  • The TDABC system notifies the staffs of unutilised resources for enabling management to act accordingly.
  • Moreover, this system uses simple time estimates for eradicating the need of developing survey process and subjective interview in order to describe the cost drivers.
  • This system accounts for variations accurately and complexities involved in business transactions (Hall et al. 2015).
  • TDABC system provides a rightful insight of the capacity in terms of units of time.
  • Finally, this system could not be formed without initial implementation of an effective ERP system for assessing costs.

Based on the above evaluation of TDABC system and comparison with ABC system and traditional costing system, it could be stated that TDABC is highly effective for Adelaide Brighton Cement. This is because this system provides greater visibility to capacity utilisation and efficiencies along with the ability of anticipating future resource demands (Kim and Schmidgall 2017). The organisation is facing increased competition domestically with Boral and abroad, which urges the need for minimising production cost. TDABC system enables Adelaide Brighton Cement in obtaining competitive edge by distributing indirect or support costs in a way that the cost information represents an effective insight of the resource needs and resource consumption. The customers of the company primarily avail these services.  

Adelaide Brighton Cement could handle resources in an effective fashion by lowering its costs, which would help in keeping competitive pricing structure in the market (Needles, Powers and Crosson 2013). The anticipated per unit costs of transactions and inquiries of the customers; for instance, might result in efforts for minimising such costs without compromising quality along with pricing changes depending on these costs.

Finally, it is significant to consider the way TDABC on services provided online in contrast to those provided through conventional channels would influence management decisions regarding such services. For online services, the management of Adelaide Brighton Cement would likely have data pertaining to cost. The data would constitute of higher indirect costs such as website design, research and development and operation. In addition, this system carries lower direct costs in contrast to a traditional service provider, since it involves lesser amount of labour (Van Der Stede 2014). However, online services would carry lesser cost per unit; the reason is greater market size to be reached on the part of online service provider. However, the limitations pertaining to geographic and physical locations are lesser on the same.

The management of Adelaide Brighton Cement could utilise such lower per unit service costs for providing competitive and accurate costing of their online cement and lime products. Moreover, TDABC system would enable the organisation in establishing the cost of providing an online service in contrast to the cost of providing it with the help of conventional channels. It would help the management to ascertain the services to be provided conventionally and the services to be provided online (Warren, Reeve and Duchac 2013). Along with this, TDABC would help the management in gaining a better insight of the overhead costs by providing the details about activities associated with providing online services and those of conventionally delivered services. Hence, it would enable the management to undertake decisions, which would increase the customer base, reduce costs and increase services.

Differences Between TDABC, Activity-Based Costing and Traditional Costing Systems

TDABC is a platform providing actionable and meaningful information to the managers inexpensively and quickly. Regardless of the business type, TDABC gives meaningful and cost-effective information of cost, which could be adjudged as significant improvement over the conventional ABC system (Warren, Reeve and Duchac 2013). Thus, the implementation of TDABC in Adelaide Brighton Cement would help in minimising overall production costs, increasing revenue base and maximising competitive advantage in the market.

Conclusion:

Based on the above discussion, it could be stated that the conventional activity-based costing system has numerous problems. In order to cover these shortcomings, time-driven activity-based costing system has been implemented, which is cheaper, simpler and excessively powerful compared to the conventional ABC system. This has been validated by the comparison among TDABC, ABC and traditional costing systems. Finally, it is recommended to Adelaide Brighton Cement to implement TDABC system, as it would enable the organisation in establishing the cost of providing an online service in contrast to the cost of providing it with the help of conventional channels. It would help the management to ascertain the services to be provided conventionally and the services to be provided online.

References:

Adelaidebrighton.com.au. (2017). Adelaide Brighton Cement. [online] Adelaide Brighton Cement. Available at: https://www.adelaidebrighton.com.au/ [Accessed 17 Dec. 2017].

Baiman, S., 2014. Some ideas for further research in managerial accounting. Journal of Management Accounting Research, 26(2), pp.119-121.

Bhimani, A., Dai, N.T., Sivabalan, P. and Tang, G., 2017. How do enterprises respond to a managerial accounting performance measure mandated by the state?. Journal of Management Accounting Research.

Braun, K.W., Tietz, W.M., Harrison, W.T., Bamber, L.S. and Horngren, C.T., 2014. Managerial accounting. Pearson.

Butler, S.A. and Ghosh, D., 2015. Individual differences in managerial accounting judgments and decision making. The British Accounting Review, 47(1), pp.33-45.

Crosson, S.V. and Needles, B.E., 2013. Managerial accounting. Cengage Learning.

Edmonds, T.P., Edmonds, C.D., Tsay, B.Y. and Olds, P.R., 2016. Fundamental managerial accounting concepts. McGraw-Hill Education.

Epure, M., 2016. Benchmarking for routines and organizational knowledge: a managerial accounting approach with performance feedback. Journal of Productivity Analysis, 46(1), pp.87-107.

Garrison, R., Noreen, E., Brewer, P., Cheng, N.S. and YUEN, C.K., 2015. Managerial Accounting: An Asian Perspective.

Guinea, F.A., 2017. MANAGERIAL ACCOUNTING SYSTEM: UTILITY, PRACTICE, MANIPULATION, NORMALIZATION. SEA: Practical Application of Science, 5(1).

Hall, L.A., Hall, L.A., Bandyopadhyay, J., Bandyopadhyay, J., McNamara, S. and McNamara, S., 2015. Coffee, costs, and competition: a case exercise for managerial accounting. The CASE Journal, 11(1), pp.95-101.

Kim, M. and Schmidgall, R.S., 2017. Key managerial and financial accounting skills for private club managers: Comparison to lodging managers. International Journal of Hospitality & Tourism Administration, pp.1-21.

Needles, B., Powers, M. and Crosson, S., 2013. Financial and managerial accounting. Nelson Education.

Van Der Stede, W.A., 2014. FOREWORDSome Ideas for Further Research in Managerial Accounting. Journal of Management Accounting Research, 26(2), pp.117-118.

Warren, C.S., Reeve, J.M. and Duchac, J., 2013. Financial & managerial accounting. Cengage Learning.

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & Managerial Accounting. John Wiley & Sons.

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