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HI5017 Managerial Accounting For Safety And Industrial Products

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  • Course Code: HI5017
  • University: Holmes Institute
  • Country: Australia

Question:

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

 

 

Answer:

Introduction: 

This report is prepared from the viewpoint of a consultant for dissecting the efficacy of Time-Driven Activity-Based Costing System (TDABC) in organisations. The consultant is employed recently in a consultancy firm, which has a main client, Wesfarmers Limited. It is one of the leading retail companies in Australia competing with Woolworths Limited in the market. The initial part of the report lays stress on describing the overall operations of the selected firm, Wesfarmers Limited. The second part is focusing on explaining the basic concept and characteristics of TDABC system. The third part deals with the assessment of comparison among traditional costing, ABC and TDABC systems. Finally, the report throws light on dissecting the viability of TDABC system at the time of enforcement in the context of Wesfarmers Limited.   

Description of Wesfarmers:

Wesfarmers Limited is an Australian firm in Western Australia having interests extensively in New Zealand and Australian chemicals, retail, coal mining, fertilisers, safety and industrial products. It is the biggest Australian retail firm in terms of revenue in 2016, as it has amounted to $65.98 million and it has overtaken BHP Billiton and Woolworths Limited (Wesfarmers.com.au 2018). The main business operations of the organisation include liquor, supermarkets, convenience stores, hotels, home improvement, departmental stores, office supplies and industrial divisions having businesses in chemicals, fertilisers and coal. It has one of the largest shareholder bases of around 530,000. 

 

Concept and features of TDABC:

Certain complexities are involved in traditional costing system and for minimising these complexities; there is enforcement of TDABC model. This is because the system is less costly, easier and highly powerful than the traditional ABC model. As pointed out by Balakrishnan, Labro and Soderstrom (2014), this system enables to simplify the costing procedure, as the requirement for interviewing or surveying the workers is not essential for allocating resource costs to tasks before they are broken down into cost objects. Orders, customers and products are few objects of cost. Moreover, with the help of TDABC system, the resource costs are distributed directly to the objects of cost. An elegant framework is inherent for conducting the same and two groups of estimates are required that could be gathered easily (Butler and Ghosh 2015). The following features are evident in the TDABC system:

  • With the help of this model, the cost involved with the supply of resource capacity is calculated. For instance, it is assumed that there is a department in Wesfarmers involved in handling the orders of the customers. TDABC model enables in calculating the cost related to equipment, supervision, occupancy, resource personnel and handover of technology to the department or process. Thus, cost capacity rate is obtained by dividing the total cost by the amount of time available from the works involved in performing the departmental work.
  • After the cost capacity rate is obtained, it is used to impel the departmental resource costs to cost objects. This is required for all the cost objects, which is obtained by estimating the resource capacity demand. In this situation, the above-mentioned department is considered and for this, a projection of time required is crucial in order to process a particular order of a customer (Cooper 2017). Conversely, there is no need to maintain the similarity in the type of customer orders. TDABC system allows variation in the time estimate and this depends on specific demands by specific orders. Examples of these types of orders are manual orders, automated orders, expedited orders, worldwide orders and orders for those customers having no previous relationship with the firm. Hence, there is simulation of the real processes utilised to conduct work across the firm. With the help of this model, higher differences and issues could be captured that the traditional ABC system fails to detect. This is made without the creation of exploding demand for estimates of data, storage or processing capacities (Cooper 2017). Thus, complexity could be embraced in this model and it avoids the need of utilising simplified and wrong ABC model. 
 

Comparison among traditional costing, ABC and TDABC systems:

Robert Kaplan was the founder of ABC system as well as TDABC system in 1980. The primary reasons detected for enforcing these models are that the allocation of overhead could not be made effectively and profitable customers could not be identified with the help of traditional costing system (Edmonds et al. 2016). An important function of a company is to measure activity cost. In addition, both the above-stated models have the ability of calculating the profit to be earned from each customer. Hence, several benefits would flow to the entities, as they could gather correct and trustful information by realising the drivers of cost. The cost drivers are of three types, which include the quantity drivers, the duration drivers and the intensity driver. The first drivers lack in accuracy; however, the cost involved is lower. The second drivers have both medium accuracy and cost; while the final driver is fully accurate; however, the expenses are significantly high.

The following are the significant points that would enable in finding out the differences between the three types of costing systems:

Traditional costing system:

It has been found out that many international firms are using the conventional costing system in order to assign manufacturing expense to the overall production. The users of this specific system assume that the initial cost driver is the volume metric and it is associated with the manufacturing expense. In this model, manufacturing expenses are distributed to the products and such allocation is made on the part of the accountants. The traditional accounting system does not distribute non-manufacturing costs, which are associated with the item production such as administration expenses. The firms mainly utilise the traditional costing system in outside financial reports, as the total cost of goods sold is provided with a value.

Moreover, traditional costing is not a modern costing system in many firms, since those manufacturing firms are engaged to use machines and computers for maximum production (Eker and Aytaç 2017). The computers and machines have outdated the system, as it is engaged to use direct labour hours in order to calculate cost. As a result, inaccurate cost assignment is made, as direct labour hours is not a suitable cost driver to use. The other drivers of cost are negated due to the traditional costing system and this would be taken into account in the product cost. However, by utilising this system, the management might not be able to make effective decisions due to non-inclusion of non-manufacturing expenses.

ABC system:

As commented by Fullerton, Kennedy and Widener (2014), an effective overview of the cost of a product is related to the ABC system. However, this system is used as a supplemental system of costing. The distribution bases that are used in this model are dissimilar with the bases present in the traditional costing system. Along with this, each activity is determined in this system associated with the item production coupled with the product cost distribution. The cost distributed to the activity is allocated to the items requiring the production activity.

The major advantage of this system could be identified, as this costing system is highly accurate. The firms distribute cost to the items only that need the activity of production. This model eliminates the distribution of the costs of products that are not relevant. The other advantages of ABC model take into account easy interpretation of cost in relation to the internal management, capability of allowing benchmarking and greater cost understanding of overhead. The enforcement of the ABC system within a firm is in need of adequate resources. However, the firms that do not have adequate funds could not adopt this system (Handy and Polimeni 2017). Lastly, there is greater chance of misinterpretation of information in this type of system.

TDABC system:

This system is the most advanced costing system, since it has the following set of features:

  • Enterprise resource planning or customer relationship management system could be included in the TDABC model (Katsikas, Funnell and Dixon 2015).
  • TDABC system has a faster processing time, as it could handle additional transactions with the help of enterprise resource planning system.
  • The staffs are notified about the resources that are not used so that the management could act appropriately.
  • Simple time estimates could be used in this system, which would eliminate the requirement of forming the process of survey and subjective interview for explaining the drivers of cost (Weygandt, Kimmel and Kieso 2015).
  • Variations could be accounted for correctly along with the problems in business transactions (Kothari, Mizik and Roychowdhury 2015).
  • An effective overview of the capacity in relation to units of time could be involved in the TDABC model.
  • This model could not be established without the primary enforcement of an appropriate ERP system in order to evaluate costs. 
 

Effectiveness of TDABC to Wesfarmers:

With adherence to the above assessment, it could be cited that TDABC system is appropriate to be implemented in Wesfarmers Limited. The reason is higher visibility to utilisation and efficacies of capacity along with the ability to estimate demands of future resources (Otley 2016). Wesfarmers is encountering rising competition from Woolworths and this increases the requirement in order to reduce the cost of production. The TDABC system would help Wesfarmers Limited to obtain competitive advantage by distributing indirect or support cost in a way that the resulting information of cost represents an effective insight of the consumption of resources and needs of resources on the part of the customers and services of the firm.  

It is important to take into account the method the TDABC on online services versus the services offered through traditional channel would affect the decisions of the management about such services. For online services, the management of Wesfarmers Limited would likely possess cost data comprising of higher indirect costs like website operation and design, research and development and lower direct costs from a traditional provider having additional labour involved (Subramaniam and Watson 2016). The per unit cost for online services would be lower due to broader market area that could be reached on the part of online service provider. The limitations would be lesser on geographical and physical locations.

The management of the firm could use reduced per unit product cost in order to give accurate and competitive cost of its retail products. In addition, this system would help the firm to form the cost of online service provision than the cost of provision through the traditional channels. This would enable the management in determining the products that would be offered traditionally and those that would be offered online (Warren and Jones 2018). In addition to this, the management of Wesfarmers could obtain a significant overview of the overhead expenses by obtaining the details regarding activities related online services and traditional services. Thus, the organisation would be able to make decisions that would raise the customer base, increase services and minimise costs with the help of the TDABC system (Weygandt, Kimmel and Kieso 2015). 

 

Conclusion:

From the above discussion, it has been found out that certain complexities are involved in traditional costing system and for minimising these complexities; there is enforcement of TDABC model. This is because the system is less costly, easier and highly powerful than the traditional ABC model. Wesfarmers is encountering rising competition from Woolworths and this increases the requirement in order to reduce the cost of production. The TDABC system would help Wesfarmers Limited to obtain competitive advantage by distributing indirect or support cost in a way that the resulting information of cost represents an effective insight of the consumption of resources and needs of resources on the part of the customers and services of the firm. The management of Wesfarmers could obtain a significant overview of the overhead expenses by obtaining the details regarding activities related online services and traditional services. Thus, the organisation would be able to make decisions that would raise the customer base, increase services and minimise costs with the help of the TDABC system. 

 

References:

Balakrishnan, R., Labro, E. and Soderstrom, N.S., 2014. Cost structure and sticky costs. Journal of management accounting research, 26(2), pp.91-116.

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.

Cooper, R., 2017. Supply chain development for the lean enterprise: interorganizational cost management. Routledge.

Cooper, R., 2017. Target costing and value engineering. Routledge.

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

Eker, M. and Aytaç, A., 2017. The Role of ERP in Advanced Managerial Accounting Techniques: A Conceptual Framework 1. Business and Economics Research Journal, 8(1), p.83.

Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2014. Lean manufacturing and firm performance: The incremental contribution of lean management accounting practices. Journal of Operations Management, 32(7-8), pp.414-428.

Handy, S.A. and Polimeni, R.S., 2017. Concept Mapping-A Graphical Tool to Enhance Learning in an Introductory Cost or Managerial Accounting Course. Journal of the Academy of Business Education, 18.

Katsikas, E., Funnell, W. and Dixon, R., 2015. Management accounting change from a hybrid institutional and managerial perspective.

Kothari, S.P., Mizik, N. and Roychowdhury, S., 2015. Managing for the moment: The role of earnings management via real activities versus accruals in SEO valuation. The Accounting Review, 91(2), pp.559-586.

Otley, D., 2016. The contingency theory of management accounting and control: 1980–2014. Management accounting research, 31, pp.45-62.

Subramaniam, C. and Watson, M.W., 2016. Additional evidence on the sticky behavior of costs. In Advances in Management Accounting (pp. 275-305). Emerald Group Publishing Limited.

Warren, C.S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.

Wesfarmers.com.au., 2018. Home. [online] Available at: https://www.wesfarmers.com.au/ [Accessed 31 Jan. 2018].

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

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Managerial accounting. Wiley.

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