Activity-Based Costing: Enhancing Accurate Costing Data For Effective Decision-Making In An Essay.

1. An explanation of the selected management accounting topic.
2. An explanation of the purpose of the two studies and what research question(s) they set out to explore about the topic.
3. A discussion about the similarities and differences in the findings of the two studies.
4. 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].

Understanding Activity-Based Costing

Currently, manufacturing organizations setting is changing significantly and competition is now more intensive than before. Accurate costing data is crucial for any organization to retain its competitiveness within the market (Reddy, Venter & Olivier 2012). Therefore, a more accurate and precise costing data is required to enhance effective decision-making in the current advanced manufacturing setting. Nonetheless, traditional costing approach is said to leads to erroneous costing data. Besides, increasing concerns regarding fixed overhead has also made traditional costing inadequate for causal assignment of the costs. In essence, the changes in management accounting has influenced world class organization in adopting some innovation, more complex and new strategies of costing like the activity-based costing with the aim of maintaining competitive advantage (Kostakis, Boskou & Palisidis 2011). As such the paper aims to explain activity-based costing as one of the management accounting topic selected in this case. The explanation would be followed by selection of two journal articles on the topic related to a real-life scenario. On the other hand, the report would then present a comparative analysis of the two article findings and the major lessons that could be learned from them.

ABC had been viewed as a complex technique of calculating cost since 1980s. It was formerly as answer to restrictions of the traditional costing approach (Sartorius, Eitzen & Kamala 2007).  Basically, ABC is the management accounting concept designed as the tool that eliminate shortages of traditional costing approach. It is usually an approach that could bring on noteworthy enhancement in value of the overhead cost assignment. This course is in a position to integrate both the causal principles and physical measures in costing tool. In other words, the key idea of the ABC was to assign costs to the operations via numerous activities which could be evaluated or measured by the cost drivers (Franz & Islam 2004). Here, the cost units are usually allocated to respective activities such as packing, quality control and planning using resource cost drivers at original level with costs of such activities being allotted to particular cost objects or products in the second phase of assignment through the activity cost drivers.

According to Kostakis, Boskou and Palisidis (2011), ABC could differ from simple that utilizes just one level of the activities to the expanded one that deals with numerous levels of the activities and giving room for the common assignment of the activity charges. Basically, ABC was formulated by both Cooper and Kaplan in the year 1988 with the aim of overcoming some of the weaknesses of traditional costing approach. In comparison to the traditional system, the ABC employed several costing drivers and allotment basis in assigning overhead costs to the final services and products (Ginoglou 2010). Several scholars highlighted that the ABC could result in a more accurate costing technique. As a result of this capability, both researchers and practitioners are highly motivated in examining aspects influencing the successful adoption of the ABC.

Elhamma and Yi Fei (2013) argued that ABC is a costing approach used in examining performance and cost of the process-related cost objects and activities. It assigns the cost activities on the basis of their utilization and assigns or allots the costs to the cost objects like customers or products. In essence, the ABC distinguishes causal relations of the drivers of costs in respective activities.

Benefits and Challenges of Activity-Based Costing

 In another study, ABC is described as a technique for measuring cost objects and presentation of the actions as well as tracing costs (Franz & Islam 2004). It usually traces the total activities in accordance to their intake of the properties and then allots the costs to the cost matters or items on the basis of their usage of the respective actions.

Reddy, Venter and Olivier (2012) detailed that ABC is the technique for cost management which is aimed at eliminating probable shortcomings or shortages intrinsic to the conservative costing technique for allocating overheads. The approach makes use of the accounting information which is produced by the accounting standards in analysing the product profitability and in identifying the unused costs information for decision-making as well as planning (Kostakis, Boskou & Palisidis 2011). It is considered as a very reliable technique for the cost analysis and is highly effective while making decision.

ABC refines the costing technique by focusing or emphasizing more on the activities as fundamental cost objects. It computes costs of the respective activities and allots the costs to the cost objects like services and products based on activities required in producing every service or product. Further, according to Cardinaels, Roodhooft and Warlop (2004), ABC is considered as an economic tool used in identifying activities and cost pools of a given company in producing services or products and in tracing the costs to the cost drivers in line with number of activities consumed. Besides, ABC is viewed as the measure of cost objects and performance activities as well as cost. In this sense, resources are usually allotted to the activities and then activities are allotted to the cost items on basis of usage or the intake of respective activities (Reddy, Venter & Olivier 2012). In this sense, ABC is considered as an instrument which offers better comprehension on the relationship between organization activities and costs.

Furthermore, the ABC is said to reduce inexactitude on cost allocation and improving performance (Wnuk-Pel 2010). It is an improved technique of assigning overhead costs, managing operating costs and examining product profitability or alternatively as the technique to monitoring and costing of the activities that comprises of tracing resource use and costing the final outputs. As such, it has been viewed as the only ascending levels of the activity management in the organizational context (Kennedy & Affleck-Graves 2001).

Basically, ABC is adopted for six major reasons; that is, performance measurement purposes, cost management and cost accounting purposes, general management reasons, for decision-making as well as in fostering better relationship. The cost accounting reasons comprises of improved product costing, superior allocation of the overheads as well as more accurate and precise costing information (Popesko 2010). On the other hand, cost management reasons mostly comprises of better comprehension of the cost drivers, development of the budgets as well as cost reduction. Performance measurements reasons comprise of measurement of the departmental efficiency, activity management and product profits as well as motivation. The approach is also used for better decision-making process which includes choice of the product mix, products, activities as well as decision about outsourcing and pricing (Kennedy & Affleck-Graves 2001). The general reasons of the ABC comprises of enabling superiority or the sustenance for the TQM enterprises as well as certifying the JIT interactions. Further, ABC could be utilized in facilitating better cost relations in respect of the supplier assessment and customer management.

Difference Between Activity-Based Costing and Traditional Costing Methods

The two articles selected in this case include "Application of Activity based Costing and Balanced Scorecard Models in a Biscuit Industry for Sustainable Competitive Advantage" by Dwivedi, Agarwal, and Chakraborty (2015) and  "Total Insurance Inc.: Application Of ABC Management Concepts For Evaluation Of Sales Teams" by Sedaghat, Sherman and Carroll (2010). Dwivedi, Agarwal and Chakraborty (2015) study deals with evaluation of application of the ABC and the BSC in the biscuit sector. With the dynamic business setting, continuously improving technologies and global competition, importance of the performance measurement within an organization has gained greater support. As such the purpose of the study was to appraise implementation of ABC in the biscuit manufacturing firm in India. Besides, with the every changes in the food sector resulting to growing variety of food in the market, there is need to come up with a better management tool to evaluate their overall performance, with the view of realigning their strategies in line with changing business setting. Therefore, the purpose was to assess development as well as execution of the ABC in costing whole choice of the yields of the biscuit manufacturing firm in India. This would offer the firm directors with strategic and realistic outlooks of charges linked with diverse actions that would be crucial for operative decision-making, planning and controlling. The paper was guided with the following research question: how does application of the ABC influence sustainable competitiveness in a biscuit producing firm in India?

Sedaghat, Sherman and Carroll (2010) study on the other hand deals with evaluation of application of the ABC concept in Total Insurance Inc. The study purposed to establish effectiveness of ABC in Total Insurance Inc at pin pointing costs and the cost drivers which affects profitability of the company. Besides, though Total Insurance Inc is the Maryland’s most successful private owned insurance firm, the company has numerous decision which have been hectic to address as a result of lack of cost allocation system including allocating agency human resources and financial to the sales teams, measuring profitability, evaluating profitability of chief clients and predicting as well as planning for the future resource needs. With this issue, the study aimed to evaluate application of the ABC and its effectiveness in addressing some of the management and cost control issues. To accomplish these purposes, the study was guided by the following research question: how does ABC improves on TII management decision-making, cost control and planning process?

The study by Sedaghat, Sherman and Carroll (2010) found out that ABC is very efficient in planning since it assigns cost to relevant activities which are considered as the actual cause of overheads. In fact, it was found out that ABC assigns cost of the actions and to cost items which are really relying on these actions.  Besides, it was found out that ABC plays a crucial role in providing the management with clear view of organization cost structure. Furthermore, it was found that ABC triggers significantly in future allotment decision-making with accurate view of the current resource commitments. Such assists in ensuring that resources are all dedicated to profitable and productive areas.

Applications of Activity-Based Costing

On the other hand, in a study by Dwivedi, Agarwal and Chakraborty (2015), it was found out that ABC helps policy makers in taking or making different managerial decisions such as projecting selling price, devising a better product mix as well as determining profitability of the products. Besides, it was established that ABC helps in allocation of costs to specific products, tasks, projects and service in line with their relevant activities which are incurred while producing these activities as well as resources needed to these activities. Further, it was found out that ABC is a management tool that is developed for the corporate performance evaluation. The study also established that ABC performs crucial function in transforming a specific firm’s mission as well as their strategies into balanced set of the integrated performance measures. In fact, it was revealed that the derived outcomes from application of the ABC tool in biscuit manufacturing firms within India is provision of the managers with strategic and realistic views on cost linked with different activity levels which is crucial for effecting controlling, decision-making and planning. Besides, it was found out that ABC offers management-oriented data with view of facilitating effective strategy monitoring and formulation.

In this case, based on the above analysis of the two findings, it is evident that both studies had similar views in regard to ABC. One, the two studies had similar view on the fact that ABC is a management-oriented information which is useful in facilitation of effective planning and decision-making process. Two, the two studies had similar view in regard to ABC being an efficient planning tool with a view that the tool help in assigning relevant cost to their respective activities. In both studies, ABC was considered as a very important tool in providing clear view of a specific firm cost structure to the management which is said to trigger significantly in their future allotment decisions.

In spite of these similarities, the two studies had their share of differences. One, the two studies were conducted in different geographical regions. For instance, the study by Sedaghat, Sherman and Carroll (2010) was conducted in Maryland while a study by Dwivedi, Agarwal and Chakraborty (2015) was conducted in India. Further, the two studies differed on sectors being investigated with one dealing with insurance sector while the other was dealing with food sector.

Several outcomes or lessons can be depicted from both studies. Nonetheless, this section would only present four lessons or outcomes from the studies; two outcomes or lessons from each study. To start with in a study by Sedaghat, Sherman and Carroll (2010) two key lessons are learned. One, through the study, it can be learned that ABC is very efficient in planning. This is based on the fact that the tool assigns cost to relevant activities which are considered as the actual cause of overheads. Besides, ABC assigns cost of the actions and to cost items which are truly relying on these actions. By doing so, it is easier for an organization or the management to plan for the future. This is an insightful lesson especially to management accountants who are assigned the role of financial planning and projection. In fact, the concept gained in this study would help the management accountant within Australia to enhance better cost management plan which would in turn help them in assigning costs to different cost objects and activities.

Conclusion

Two, it is also learned that ABC plays a crucial role in providing the management with clear view of organization cost structure. This is based on the fact that through the study the authors indicated that ABC triggers significantly in future allotment decision-making with accurate view of the current resource commitments. This is said to assist in ensuring resources are all devoted to lucrative and productive areas; hence, providing a clear view of the cost arrangement within the firm. This lesson is very applicable when it comes to management accountants in Australia as it would give them insights to implement the ABC in their management which would in turn help them run their organization smoothly. Basically, with the above concept, the management accountants would apply ABC in allocating costs to their products, tasks and services; hence, enhancing clear cost structure.

In a study by byu Dwivedi, Agarwal and Chakraborty (2015) two key lessons can be depicted. One, it was learned that ABC plays a crucial role in helping organization’s policy makers in making different managerial decisions such as projecting selling price or determining profitability of a specific product as well as devising of better product mix. In this case, the concept grabbed in this study would help the management accountants in Australia in setting their prices, determining profitability level of their organizations and in coming or determining the best product mix which would yield higher return at the end.

Two, it was learned that ABC is separately adopted in order to facilitate balanced view of a specific organizational performance. In essence, ABC plays a crucial role in organization performance since it helps the management in evaluating overall performance of a specific firm on regular basis with the aim of realigning its key strategies to align them with the varying business setting. This lesson is applicable to the management accountant professional working in Australia since with such a view, these professionals would work hard towards enhancement of better organizational performance. Indeed, the management accountants would apply this concept in aligning their organization’s strategies to be in line with the current market structure.

In fact through the two studies, the management accountants within Australia who are assigned the job of financial management would insight the companies to implement this new management tool in their operations. By doing so, they would be able to enhance better managerial decision-making and in turn manage to reduce shortcoming which are said to arise from poor management accounting. Furthermore, the management accountant would be in a position to air their views on the importance of ABC in identifying unprofitable products or operations. This would indeed reduce unnecessary costs incurred by the organizations and instead improve on their profitability.

Conclusion 

To conclude, this report aimed at evaluating one of the management accounting topic in a real-life scenario. In this case, ABC was selected as the topic for assessment. It was found out that ABC is the management accounting concept designed as the tool that eliminate shortages of traditional costing approach. Actually, it can be concluded that ABC incorporates both the causal principles and physical measures in costing system. This is based on the notion that the system assigns costs to the operations via numerous activities which could be evaluated or measured by the cost drivers. Basically, it can be concluded that ABC employ numerous costing drivers and allotment basis while assigning overhead costs to the final services and products. Besides, based on the two studies selected in this case, it can be concluded that ABC is a more accurate costing technique as it helps in examining performance and cost of the process-related cost objects and activities and recognizes causal relations of the cost drivers to the activities. This is crucial concept which helps the company in eliminating probable shortcomings or shortages inherent to the conservative costing technique in assigning overheads. Further, it can be stated that ABC helps in refining the costing technique emphasizing more on the activities as fundamental cost objects. This is based on the notion that the technique computes costs of the respective activities and allots the costs to the cost objects like services and products based on activities required in producing every service or product. Furthermore, based on the above analysis of the two studies, ABC was found to be an efficient management tool since it helps in reduction of inexactitude on cost allocation and improving performance. It can also be concluded that ABC helps in assignment of overhead costs, managing operating costs as well as examining product profitability. Therefore, ABC is considered as an instrument which offers better comprehension on the relationship between organization activities and costs. 

References

Cardinaels, E, Roodhooft, F & Warlop, L 2004, "The Value of Activity-Based Costing in Competitive Pricing Decisions", Journal of Management Accounting Research, vol. 16, pp. 133-148.

Dwivedi, R., Agarwal, A. & Chakraborty, S. 2015, "Application of Activity based Costing and Balanced Scorecard Models in a Biscuit Industry for Sustainable Competitive Advantage", Journal of Advanced Research in Management, vol. 6, no. 1, pp. 5-7.

Elhamma, A & Yi Fei, ,Zhang 2013, "The relationship between activity based costing, business strategy and performance in Moroccan Enterprises", Accounting and Management Information Systems, vol. 12, no. 1, pp. 22-38.

Franz, WK & Islam, M 2004, "US and German activity-based costing: A critical comparison and system acceptability propositions", Benchmarking, vol. 11, no. 1, pp. 31-51.

Ginoglou, D 2010, "Optimization Distribution Of Activity Based Costing Using Agent Based Technologies", European Research Studies, vol. 13, no. 3, pp. 195-218.

Kantor, J & Maital, S 1999, "Measuring efficiency by product group: Integrating DEA with activity-based accounting in a large Mideast bank", Interfaces, vol. 29, no. 3, pp. 27-36.

Kennedy, T & Affleck-Graves, J 2001, "The impact of activity-based costing techniques on firm performance", Journal of Management Accounting Research, vol. 13, pp. 19-45.  

Kostakis, H, Boskou, G & Palisidis, G 2011, "Modelling activity-based costing in restaurants", Journal of Modelling in Management, vol. 6, no. 3, pp. 243-257.

Popesko, B 2010, "Activity-based costing application methodology for manufacturing industries", E+M Ekonomie a Management, , no. 1, pp. 103-114.

Reddy, K, Venter, HS & Olivier, MS 2012, "Using time-driven activity-based costing to manage digital forensic readiness in large organisations", Information Systems Frontiers, vol. 14, no. 5, pp. 1061-1077.

Sartorius, K, Eitzen, C & Kamala, P 2007, "The design and implementation of Activity Based Costing (ABC): a South African survey", Meditari Accountancy Research, vol. 15, no. 2, pp. 1-21.

Sedaghat, AM, Sherman, AK & Carroll, T 2010, "Total Insurance Inc.: Application Of ABC Management Concepts For Evaluation Of Sales Teams", Journal of Business Case Studies, vol. 6, no. 5, pp. 97-105.

Wnuk-Pel, T 2010, "Application of activity - based costing in companies in Poland", Comparative Economic Research, vol. 13, no. 3, pp. 107.