In this report the discussion has been done about the different aspects of method for activity based costing. The method is usually used in the allocation and bifurcation of overheads costs to several departments and products. This is a more practical and logic based method for allocation. The report explained the method properly and consist several details about the method. In this report effort has been made to explain the meaning, advantage and disadvantage of such method. After explaining the concept of method a research based on two articles is made. After entire analysis of each study a research related question is framed. Also the similarities and difference between these two studies are made in the further part of report. The studies help the accountants of management to cope with the issue of management accounting. The analysis of both studies shows their ability to resolve the problems regarding costing in business. The report focuses on the outcomes of learning from these studies. Further the analysis of whole report includes the role of the activity based costing method in an organisation. It performs as a tool in any organisation because it helps to determine the cost on business. Both of the studies are included in the report to provide a clear view about the benefits of adopting the method of activity based accounting in a business. With the help of this study we can properly understand that how this method could be used by a business to determine costing of different departments and processes.
In the process of identify the Activity based costing first it is necessary to identify the cost that we need to allocate. It is critical step in the complete process as it is not possible to waste time on big project scope. For example, if we want to identify the cost of distribution channel, we will not see the research cost as it is related to the product not channel, after this advertising or warehousing cost will be identified. Cost pools will be created to calculate the service cost of the different part of the organisation. Secondary cost pools may be included which is depending on its nature that how it will be allocated. There is a need for the creation of cost pool at each distribution channel and facility at the batch level. In batch level, cost is assigned on the size of the batch. This kind of cost pool creation is aligned with the production of goods or services. To allocate the cost in secondary cost pool to primary pool and to the cost objects, there is a need to measure the activity drivers. These activity drivers will allocate the content of primary pool to cost object. The result of these reports is converted for the management consumption. Management can ask to reduce the quantity of drivers which will help in reducing the overhead cost. This Process of Activity based costing is grown because of increasing manufacturing overhead cost and the diversity of products and customers’ demands.
Use of Activity Based Costing
In Activity based costing, company calculates the cost of resources of each activity. This cost is assigned to the products that are in need to activities. This process of Activity Based Costing will be better understood with the help of this example: if a company is manufacturing two products which product 123 that is low volume item and needs certain activities like; additional engineering, special engineering and others as it is ordered in small quantity and another similar product, Product 999. This second product is running continuously and high volume product and requiring little attention. If traditional costing is used in this company, it will allocate its overhead to products on its machine hours. In this process little overhead cost to Product 123 as it does not have Many machine hours but requires a lot of testing, servicing and setup activities. In other way, Product 999 will be allocated a lot amount of overhead but less overhead activity. This will come as a miscalculation of cost of manufacturing overhead. By using Activity Based Costing shortcomings will be overcome as it will assign overhead on more than one activity. This process of costing causes the company to use its resources by calculating the cost of resources used in activity and assign the cost to the products that demand the activity.
Worldwide this procedure is adopted in a low rate and no new adaptation was there. In Australia organisations have implemented this approach in comparison to traditional cost management system and found it successful. This result is stronger than the usage of this approach in the US. In Australian companies there was support of top management, organizational support and internal champion who were associated with the process of Activity Based Costing. One organisational factor that can support or reject the Activity Based Costing which is associated with it is its internal champion.
In today’s world of intense competition and automation this method of Activity Based Costing is approached generously in the Australian market as it is most accurate form for the cost allocation. It is claimed by many authors. Many authors have a view on this that it provides to the company an improved profitability and reduction of the cost. Activity Based Costing is an innovative step in the management of the Australian company as it claimed to offer benefits to the companies in the way of better decision-making, cost control and many other cost reduction methods were introduced in that. It creates a competitive approach in the management. The implementation of Activity Based Costing required a big change in the internal system of the company in its cost allocation to the products. But this theory also has some lacuna in the way of not having different cultural setting and stages for the development of the industry. The implementation of this theory required support and level of education of the people involved in the company towards the solving of problem (Robin, et al. (2015).
The concept for adopting the activity based costing
Every organisation wants to reduce its cost to gain more profit. In order to which, the management accountants of every organisation try to use the best method of accounting for ascertaining the cost for their business. The activity based accounting method of cost accounting is proved to be a good method to reduce the cost and to ascertain the effective outcomes from business. It helps to strengthen the roots of cost allocation. In order to get the accurate results about the operational level of several products and their performances, the cost allocation is to be done. It is not possible or quite tough to determine the performance of any particular product or department unless the costs regarding respective departments are allocated properly (Subramaniam, &Watson, 2016). When the management thinks about an accurate method of cost allocation then the first name which appears in their mind is activity based cost accounting method. Although, before going for this method, the management should analysis each and every aspect of such method. Because this is not mandatory that method provides the same benefits to all the organisations. If the cost engaged with the execution of ABC method is more than the benefits derived by this method then this is not advisable for company to adopt such method. The main objective of such method is to enhance and strengthen the structure of organisation which provides effective outcomes in overall aspects. Apart from that it also ensures the accurate bifurcation of cost among all the departments and functions of an organisation (Kaplan, et al. 2014).
Activity based costing is a more logical way for assigning manufacturing overhead cost to the products than the traditional approach which was in a way of allocating cost on the basis of machine hours.
The method of Activity Based Costing was developed in the United States. Robert Kaplan is known as the founder of the theoretical principles of this activity in cost management.
This type of costing spends cost on the activities which are the real cause of overhead.
It assigns cost on the products which are demanding the activities. It works best in complex situations where processes are tangled and not easy to sort out (Kaplan, et al. 2014).
It is not easy to use in the environment where production process is abridged.
This method was introduced to eliminate the traditional calculation of cost pricing which was based on the volume of products (Langfield-Smith, et al. 2017).
- The method of activity based accounting is depended upon the several activities of an organisation which is to be identified and segregated by their nature or type.
- Once the identification of these activities is done then as per the basis of consumption and utilization level of different departments, the accumulation of costs is to be done.
- Usually it decides the costs engaged in several processes and determine the cost drivers behind all activities (Kaplan, et al. 2014).
- It is time consuming and complex for the organization.
- It is hard to determine the cost drivers in the process system of Organizaiton so that the cost could be absorbed in other departments.
- If the cost of adopting the ABC model is set high as compared to the benefits provided by the model then it would be hard for Organizaiton to accept the ABC model as its costing method.
- The costing drivers would be different and unique in each and every Organizaiton based on their nature and complexity of the work (Kumar, & Reinartz, 2018).
STUDY 1: Journal of Management Accounting Research
This study focuses on the adoption of the activity based costing and other influencing factors which may impact the use of activity based costing in process. It would be hard for the organization to determine the activity based costing in process. It is analyzed that approval from the department would be required for adopting the activity based costing model (Kuo, & Yang, 2014).
- Certain stages of approvals and changes in the business policies would be done in Organizaiton while adopting the activity based costing (Anzai, et al. 2017).
- The proper level of cost and benefit analysis would also be required before implementing the activity base costing in process.
- It helps the company to distribute the specified cost in different departments or activities. Mostly such method is used by the manufacturing companies because the functions of this industry based on the overhead costs (, et al. 2017).
- All the activities are related with different overheads such as the number of happening of an activity or the total product or unit derived from an activity etc. Generally, these are known as cost drivers on the basis of which the cost is to be allocated. The purchase order, consumption of power, quality inspection of unit etc. are the commonly used cost drivers in an entity (Robin, et al. (2015).
After analysing these two articles, following research questions have been formulated which focuses on the adoption of the activitity base costing and stages involved in adapting with the activity based costing.
- What stages would need to be followed by organization for adopting the activity based activity?
- Explicit the complexity of the organization and related factors which may impact the adoption of the activity based costing model?
STUDY 2: Journal of Applied Management Accounting Research
This study focuses on the use of activity based costing and how organization could be benefited by using the ABC model in the business process organization. In this journal, the main focus has been made on the cost drivers and other influential factors which may be required for the Organizaiton while adopting the activity based costing in the process. It is analyzed that there will be following steps would be followed while adopting the activity based costing method (Sakao, & Lindahl, 2015).
- Initiation stage- In this stage, organization would analysis whether it would be feasible to adopt the new ABC costing in its process.
- Adoption of ABC Costing process: In this stage, Organization needs to arrange the finance and new job process for adopting the ABC costing model (Agarwal, & Jain, 2014).
- Changes in the process and policies: This may requires changes in the policies and rules which company need to make in order to adopt the ABC costing model.
- Adopted activity based costing: This is related to undertaken activities which could be useful to set up proper cost drivers to absorb the cost in the different process (Schaltegger, & Burritt, 2017).
The success of the activity based costing in Australia is too high due to its increased benefits. However, due to the lack understanding and complexity of adoption of the activity based costing, it might be hard for the organization to adapt with the activity based costing (Sekaran, & Bougie, 2016).
How far organization has changed for the adoption of the activity based costing in Australia. How activity based costing cold be beneficial for the organization?
The main similarities between both articles are that they both are focusing on the increasing outcomes in the costing process of organization. They both focuses on the integrated use of the activity based costing in the process so that organization could easily bifurcate the costing in the related department. However, these both articles show that the activity based costing is totally based on the set cost drivers. These cost drivers plays pivotal role in the business success of organization. These articles have reflected that adoption of the activity based costing is based on the adopted business model (Dong, Liu, & Lin, 2014). If it is not suited with the ABC costing then company will have to make the changes in its activity based costing. Both journal articles focus on the use of the cost drivers and set parameters. In context with the practical example, by using Activity Based Costing, shortcomings and discrepancies involved in the costing process will be overcome as it will assign overhead on more than one activity. This process of costing causes the company to use its resources by calculating the cost of resources used in activity and assign the cost to the products that demand the activity. These both articles have focused on the issues, benefits and cost associated with the ABC costing models adoption in business process of organization (Najjar, Strickland, & Kaplan, 2017).
These two articles are different from each other as they both are prepared on the basis of different facts, estimation and regression of the undertaken work. In the first study, implementation of the main factors related to the organization, and environment have been assed. It allows company to formulate the strategies and business policies to implement the ABC costing model. Another study focus on the benefits and cost associated with the ABC costing model. If company implement the ABC costing model then what benefits and problems it would have (Dong, Liu, and Lin, 2014). Another difference which has been found in both articles is related to the use of data. One article focussed on using the complex data and program based on the regression analysis and other article used the general information which might positively and negatively impact the costing method if ABC costing model is adopted. The cost and benefit analysis is very much required for adoption of ABC costing model in organization (Gangwar, Date, & Ramaswamy, 2015).
These leaning outcomes have been set to determine whether the adoption of the activity based costing would be beneficial for the Organizaiton or not (Fenn, et al.. 2015).
- The accountant before accepting the activity based costing must undertake the feasible study plan.
- They should also evaluate the business process and integration process to align the activity based costing with the process (Kumar, & Reinartz, 2018).
The second learning outcomes focuses on mitigating the process issue while implementing the activity based costing teaching the cost employees to learn the ABC costing model
- Company should analysis the issues and malfunctioning which is faced by other Organizaiton while implementing the activity based costing model. It is the best way to mitigate these issues for the future outcomes (Kaplan, 2014).
- There should be proper supporting back up plan
- Use of the proper costing method and training and development for employees.
This report has reflected the key understanding on the activity based costing and how important it has become for absorbing the costing in different jobs of organization. the crux of these two articles is that company could have lot of benefits if it adopts activity based costing in its process department. The main thing which has been observed is that only big organization which is facing complexity and issues in bifurcating the costing in its different department should adopt the activity based costing. The main reason behind is that it is highly costing and may result to higher initial outflow therefore, small business organization might not be benefited if they install activity based costing in their costing process methodology due to the associated cash outflow. The proper cost and benefit analysis should be adopted by company before accepting the activity based costing model. Nonetheless, company also needs to change its business process costing policies and methods of undertaking the process system while adopting the activity based costing model in its business.
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