I Am Currently Working On An Essay On The Topic Of Activity Based Costing Method In Management Accounting.

Assignment Requirements: 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.

Explanation of Activity based costing method

For effective financial transaction and performance within organisation, management accounting one of the most significant concepts by which firm can effectively carry its activities. It is a procedure to analyse and assess the financial performance of the corporation by which effective decision can take by finance manager for future activities of business unit. Management accounting is a systematic procedure of preparing management report and accounts that deliver systematic, accurate and timely information of finance to manager regarding day to dag transection within business. The present report is based on the activity based costing method which is one of the significant tools of management accounting. Two different journal article related to management accounting topic that is activity based costing has been discussed with respect of organisations in the Australia.

In the 1980s, Activity based costing method is firstly defined by the Kaplan and Bruns. It is one of the significant methods and alternative to absorption costing that allows to manager in understanding business profitability and generated revenue by product and services. It provides effective information to manager regarding business activities, transection and function through which right and accurate decision of business can be taken by manager in efficient manner. Activity based costing method considers the cost drivers and activities through which cost can increase (Armitage, Webb and Glynn, 2016). In order to initiate the activity based costing method within organisation, manager must have to consider various phases of the procedure. In the first stage, manager should identify the activities and activity pool in the ABC process. Once the activity pool and activities found then in next stage, manager directly estimates and trace costs to activities and cost objects. In the third stage, manager assigns the costs to activity costs pool and then calculates activity cost drivers rates (Ambe, 2016). Once the activity cost drivers rates are identified then manager have responsibility to assign costs to cost objects. After assigning the cost to cost objects, finally report can prepare by manager within the organisation. By following these discussed stages of the activity based costing, manager can easily find out right information about the finance and take future decision regarding business budget.

Activity based costing is one of the effective approach of monitoring and costing the activities which considers costing final outcomes and tracing resource consumption. In this aspect, resources are assigned to activities to cost objects.

In a simple word, it can be said that activity based costing is the method of costing that determines activities within corporation and allocate the costs to every activities with resources to all services and items. In this aspect of management accounting tool, manager allocate more indirect costs into direct costs as compare to the conventional costing (Bleyen and et.al., 2017). It is the approach of monitoring and costing of activities that involves tracing resource consumption and final costing outcomes. In an of organisation, the main purpose of activity based costing is to estimate the cost  components of the total activities, services and commodity through which organisation can able to take the decisions on the following aspects-

• Manager can easily estimate and determine those items and commodities which are not profitable and those are overpriced (ElGammal and et.al., 2016).
• Manager can take the decision regarding the production of product and services (Hall, 2016). It aids in estimate and identify the production and services that are ineffective and allocate processing the concepts that lead to the very same item at a good yield.
• With help of ABC method, company can assign costs of resources through activities to the commodity and services provided to its clients.
• Corporation can understand the product and customer cost and revenue based on the production and performing processes (Gumba and et.al., 2017).

Implementation of Activity Based Costing

As per the discussion it has been analysed and assessed that activity based costing considers on the allocation of cost in the operation management. This aids in segregate the overhead cost, variable cost and fixed cost. In order to implement the activity based costing, organisation must consider various ways which are discussed below-

Determine and analyse the requirement of ABC- This is one of the important stage in the implementation of the activity based costing under which organisation have to determine the viability of ABC method (Hoozée and Hansen, 2017).

Identify training needs-Once the viability of ABC method is determined then in next stage  top management requires to provide basic training to all personnel’s. In addition to this, workshop session will organise for the senior employees like manager, director etc.

Discuss scope of the project- In this stage, organisation require evaluating the objective and mission for the project. By setting the objective and mission of the project, manager can estimate the clear path of the project (Kurakova, 2017).

Diagnose the drivers and activities- In this aspect, manager determine the drives and activities for the project. With help of estimate the cost drivers and activities, manager can easily   implement the activity based costing method within business unit.

Develop a cost and operational flow diagram- Once the activity and cost drivers are estimated within the organisation then in the next stage, manager create  cost and flow diagram under which resources and activities  discover in clear manner (Heinicke, Guenther and Widener, 2016). In this aspect, manager effectively understand that how resources and activities are related to product and services.

Gathering information- In this stage, manager collect information where operation relationship can discover by diagram.

Develop a software model, validate and reconcile- In this stage, manager uses the software model to interpret information.

Design management report by understand outcomes- Manager are responsible for prepare management reports and interpret outcomes in effective and efficient manner (Rogulenko and et.al., 2016).

As per the above discussion it has been analysed and assessed that by considers various stages, manager of the organisation can implement activity based costing method. Company can take the strategic decisions related to outsourcing, pricing, measurement, identification and measurement of procedure upgrading edges (Oseifuah, 2018). With help of activity based costing method, company can identify allocate more resource in activities, department and profitable product. It also aids in controlling the expenditure and cost associated with department and per product level. Furthermore, manager can easily find unnecessary costs associated with activities. It can be said that ABC method helps in better management, performance measurement, effective budgeting, calculate the costs more accurately and efficiently within the organisation. With help of ABC method, manager can fix the price of product and services and ensure the product and customer profitability.

Benefits of Activity Based Costing

 Activity based costing is the method of managerial accounting technique that smidgens overhead costs to activities and then allocate them to items. It considers on identifying activities, production and processes that are used to procedure of a job.

Basuki and Riediansyaf. (2014) stated that ABC method is time consuming and costly and its information is expensive to store, process and report. The activity based costing model does not provide an integrated view of business wide profitability opportunities. In order to overcome these difficulties associated with activity based costing method, there are made Time driven activity based costing through which  organisation can forecast resource demands ad prepare budget for resources capacity according to complexity and predicted order quantities. With help of time driven activity based costing method,   manager can integrate with information which is available from ERP and customer relationship management.

John C Lere (2000) said that In the context of Hospitality sector, Time driven activity based costing is very helpful by which manager of Hotel can estimate cost associated with activities and determine the profitability. Both direct and indirect costs in the hotel can calculated with help of time driven activity based costing method. It is very effective for hotel service costing as by use of TDABC method, cost of the room services cab calculate more precisely. In order to implement the Time driven activity based costing within the Hotel Windsor in Melbourne, manager needs to consider several components determine the activity cost pools, activity measures, and capacity cost rate. Manager is also needs to estimate time consumption, cost of capacity supplied ad practical capacity.

The TDABC model in the hotel force designed to determine the activities that happen in core unit and supporting unit by use of tables of activities. Drew Stapleton, Sanghamitra Pati & Erik Beach & Poomipak Julmanichoti (2004) stated that determine the Unit time for each activity, manager can consider the room division departments. With help of TDABC method,  Hotel Windsor in Melbourne can easily estimate the Room data, Room inventory cost, direct human resource, indirect human resource, fixed assets in room type, overhead costs. In order to determine the cost of room in the Hotel Windsor in Melbourne, manager can apply a  very basic target pricing approach in which price are set at cost plus rate of return based on turn over that is room cost calculation is the outcome of turn over target.

Hotel manager can understand the all associated cost with operation, activities, function within the hotel. According to the view of Nazarova and et.al., (2016) with help of activity based costing method in the hotel, manager can trace undistributed operating expenditures to specific food items like menu. By estimating the operation expenditures to menu items, hotel manager can save the additional cost. Basically, Hotel’s product and service prices are usually calculated strictly as a function of costs of goods sold with marked price. In addition to this, price of the menu products reflects indirectly to undistributed operation prices such as fixed costs, labour charges, utilities etc. With help of activity based costing method, restaurant manager can also examine all huge development, manufacturing and production activities and allows for the identification and deduction of activities. In the hotel, while manager calculates the ABC then the marketing function and accounting can cooperatively apply activity based pricing technique by focused relationship between ABC and  determined menu price. In the opinion of Kurakova, (2017) stated that with help of activity based costing organisation can take pricing decision of each and every product and services in the hotel. It can be said with help of ABC method, restaurant and hotel can gain tangible benefits. One of the major benefit of implementation of activity based costing method in the restaurant and hotel is that manager of hotel can trace restaurant overhead cost through activity centers to menu products. In addition to this, by applies ABC method, organisation can reveal the true cost structure of each and every individual menu products. Each and every activities cost and expenditure can easily estimate by help of activity based costing method. Manager can easily discover all required cost that is required for the restaurant activities like production, distribution, marketing, promotion , supply chain management, customer relationship management etc.

Explanation of Two Studies and their Purposes

According to the view of (Beheshti, 2004; Mahal & Hossain, 2015;Zhang & Isa, 2010) stated that activity based costing method is power full technique for pricing than traditional costing system. In the manufacturing corporation, ABC method can implement for estimate the cost associated with activities and function. It helps in taking the best decision for the future activities of business enterprise.  A cost driver can estimate which identify cost per unit. Activity based costing implement by identify the factory activities, determine the cost drivers for each activity, select necessary control and  diagnose cost effective advanced system. In the opinion of Bleyen and et.al., (2017) stated that successful implementation of the activity based costing is based on the hard work of cross functional department rather than accounting department within manufacturing company. In order to design the ABC system, major decision should consider such as  system should integrated with  standalone system and existing cost system,  before implementation, formal design should be approved, ownership should take by specific personnel,  system should report future and historical cost, initial design should be complex and simple. In the opinion of Amb, (2016) in the manufacturing organisation, the main purpose of using activity based costing is to deliver effective benefit to company at the lowest cost. Traditional cost cannot determine the accurate cost of product and services. It also unable to deliver useful information to corporation. Organisation cannot take strategic decision with help of information gathered from traditional costing. With help of activity based costing, firm can evaluate their customers and deliver accurate information regarding expenses for price quotes. With help of ABC method, organisation can able to make ranking to overall customer value and revenue according to job. On the basis of this information, organisation can target resource through which company can gain higher value of buyers. Ambe, (2016) stated that in the implementation of ABC change process is on-going one and it have major three components such as catalysts, facilitator’s ad motivators. By interacting these three elements, cost accounting can easily promoted.

In the manufacturing company, the major used of ABC method is to supplement to the organisation’s usual costing method. Top management assigns all responsibility to cross functional department rather than accounting department. They believe that design and implementation of ABC is a great responsibility of cross functional team rather than accounting department. In the manufacturing organisation, Activity based costing helps in increasing the operational performance by assigning upstairs costs based on the actual consumption of the resource by every activity. Interdependencies of the cost drivers to each and every activity can recognise and determined by the activity based costing method. Through determine weak product line and accurate costs, activity based costing method assist in enhancing corporation profitability and revenue. In the manufacturing organisation, ABC method assists in overcome bottleneck through which growth can improve significantly. Manager can largely beneficial by implementing ABC within company by which they can gather accurate information regarding future activities and take effective decision regarding pricing production, packaging, promotion, distribution etc. It aids in taking decisions regarding marketing, product designing, product mix, pricing etc within the organisation. With assistance of the activity based costing method, management can able to analyse and see that where the most important cost required within the activities and function of business. While ABC method implement within business  venture then  changes in the structure of management must occur for initiation of the application of activity based costing. For capital production process, it is very essential to change in the management structure.

Similarities

Differences

One of the major similarities of these two studies is that these are based on the significance of Activity based costing within the business enterprise. Both study discussed the benefits, positive impact and implementation of Activity based costing within the organisation. Both journal article provides clear knowledge and understanding about impact of activity based costing method in order to improve business performance and productivity.

The main difference between two study is that one is based on the Application of Time driven Activity based costing in the hospitality industry and another study is based on the Activity based costing (ABC)- An effective technique for better management. Another main difference between two article based study is that one study have main purpose is to Implementation of the Activity based costing in the Hospitality organisation and another study have main purpose is to Implementation of activity based costing in the organisation for better management.

Outcome of the study 1:

Activity based costing is the strategy for costing that decides exercises inside enterprise and designate the expenses to each action with assets to all administrations and things. In this part of management accounting tool, supervisor apportions more circuitous expenses into guide costs as contrast with the ordinary costing. Supervisor can without much of a stretch gauge and decides those things and items which are not productive and those are overrated. Manager can take the choice in regards to the creation of item and administrations. It helps in gauge and recognizes the creation and administrations that are inadequate and designate handling the ideas that prompt the simple same thing at a decent yield. With help of ABC technique, organization can allot expenses of assets through exercises to the product and services gave to its customers. In the hospitality sector, the Activity based costing helps to manager in allocate the cost associated with various activities on the restaurant like menu item, production, distribution, promotion, marketing, supply chain etc.

Outcome of the study 2:

With help of activity based costing strategy, organization can recognize assign more asset in exercises, office and beneficial item. It additionally helps in controlling the use and cost related with division and per item level. From the above two studies, it has been analysed and found that activity based costing method largely beneficial within the manufacturing organisation and hotel. In order to successful implementation of activity based costing, not only accountant department is responsible but also all cross functional department is equally responsible. Action based costing is one of the compelling methodology of observing and costing the exercises which thinks about costing ultimate results and following asset utilization. In this viewpoint, assets are doled out to exercises to cost objects. With help of ABC strategy, organization can dole out expenses of assets through exercises to the item and service gave to its customers. Corporation can estimate the item and client cost and income related to production and performing procedure. It has been also found from the studies that activity based costing is a powerful technique for firm to have accurate and impressive cost for product and services. Organisation can generate effective profitability by save unnecessary expenditure in the production, manufacturing and business operation. With help of ABC organisation can generate the accurate and necessary information for the business enterprise that is required for total quality management to evaluate the costs associated with activities.

Conclusion

On the basis of discussed subject, it has been concluded from entire report that Activity based costing method considers the cost drivers and activities through which cost can increase.  Activity based costing is one of the actual method of monitoring and costing the activities which studies costing final outcomes and outlining resource depletion. It has been also summarised from this study that by applies ABC method, organisation can reveal the true cost structure of each and every individual menu products. In both manufacturing and hospitality sector, implementation of activity based costing method is very important by which cost associated with activities can determine and manager can take future decision for business.

References

Amrik S. Sohal & Walter W.C. Chung, “Activity based costing in manufacturing: two case studies on implementation”, Integrated Manufacturing Systems 9/3 [1998] 137-147.

Armitage, H. M., Webb, A. and Glynn, J., 2016. The use of management accounting techniques by small and medium?sized enterprises: a field study of Canadian and Australian practice. Accounting Perspectives. 15(1). pp.31-69.

Ambe, C.M., 2016. Environmental management accounting in South Africa: Status, challenges and implementation framework

Bleyen, P. and et.al., 2017. Linking budgeting to results? Evidence about performance budgets in European municipalities based on a comparative analytical model. Public Management Review. 19(7). pp.932-953.

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ElGammal, W. and et.al., 2016. Reasons behind the non-application of the activity based costing system in developing countries, case of Lebanon. The Journal of Developing Areas. 50(3). pp.417-435.

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Activity based costing (ABC) An effective Tool for better management, 2015.[Online].Available through:https://www.researchgate.net/publication/309398925_Activity-Based_Costing_ABC_-_An_Effective_Tool_for_Better_Management

Amrik S. Sohal & Walter W.C. Chung, “Activity based costing in manufacturing: two case studies on implementation”, Integrated Manufacturing Systems 9/3 [1998] 137-147.