Activity Based Costing Model: Definition, Benefits, And Recommendations Essay.

Discuss about the Literature Survey Cost of Quality Models.

Activity based costing model is a costing methodology whose purpose is to identify the organisations and assigning the cost of each activity with resources to every kind of product and services according to their individual level of consumption. In terms of conventional costing this model assigns more indirect costs into the direct costs (Otley, 2015).

According to the definition of the Chartered Institute of Management Accountants, ABC is an approach to the costing and monitoring of the activities which involves tracing resource consumption and for the final outputs the costs are allocated accordingly (Financial Web, 2017).

Firstly the cost is divided into two major categories: that is fixed and variable cost, which is necessary to provide the quality information

A proper assessment of the costing system can lead to the positive thought process of becoming more competitive against the existing structure. As a result of this the company can strive for improvement in the quality of the product and simultaneously focusing on reduction of cost. This analysis will eventually be helpful in simulating the activity of organising the process into a proper structure.

Under the conventional system, the costing exercises have relied on broad averages. That is where the birth of ABC takes place to refine the existing system of costing from the major curse of the average as far as possible. Therefore the ABC model helped in removing the cascading the effect (Howell, S.B. et al 2014).

With the introduction of the activity based costing methodology there is a transparency in the determination of the costs which were defined loosely against the cause and effect relationship. Therefore, it was necessary to implement the ABC model in Trilogy International. The costs are having an identification mode which can eventually deliver a balance between the over costing and the under costing (Vaxevanidis and Petropoulos, 2018).

When the product subsidisation strategy is inclusive of the pricing policy, a big jump can be seen in the business. Pricing is one of the primary drivers for the customers of the Trilogy International. If the quality and the customers both align with the strategy followed by the Trilogy International the indecisive customers are also ready to buy the relevant product.

As the industry and businesses grow in an organisation, the processes become cumbersome and eventually there are lot of complications which have been increased significantly over a period of time. An average product of manufacturing normally requires more than 4 to 5 processes. To deal with the complications which have been raised due to these processes, ABC acts as a blessing in disguise. ABC model helps in determining the process easily and allocation of costs become easy (Flink, 2017).

Benefits of Activity Based Costing Model

Earlier the alternative for the product were hardly available but now there are lot of options available in products due to the packaging, size, colour, design, durability and weight. Again the ABC model helps in pricing of the products weight wise accordingly. The customisation is necessary to keep an edge over the competitors. A little customisation can change the perception of the customer while having the buying alternatives (Angelopoulos and Pollalis, 2017).

Under this method the cost of the activities gets distributed proportionately. This saves the cost of the company and the resources of the organisation. A reduction in the cost would not reduce the sales volume, rather than the sales might increase the number of customers (Freiesleben, 2014).

The corporate strategies of the Trilogy International involve in core strategy whose focus has been similar since past two decades which is to grow the business in the segments of the beauty, fragrance and salon.

The second strategy under the Trilogy International Limited is to continuously focus on the development of the distribution network in the New Zealand and to offer the best class service to existing and new brand principals. Under this strategy a one fit solution in the New Zealand market has been given to the customers (Weygandt, Kimmel and Kieso, 2015).

The channels to market strategy also include pharmacies, department stores. The corporate strategies of the company were to complement the existing businesses channels to deliver more services to the customers with reference to the more satisfaction.

In addition to providing a good premium distribution services the company continued to focus at the development of the business opportunities by sourcing on trend. The brand which is under portfolio of the business needs to be considered.

Based on the existing ABC model following are the two recommendations which needs to be implemented so that the business can grow at a faster pace.

To appropriately allocate the scheme of the costs of division, a method is necessary for the purpose of creation of transparency in all the tasks of the company. The value chain method can also be included along with the method of the ABC costing to smoothen the functioning of the organisation. This way the resources will be pooled on the timely basis and the costs of manufacturing and distributing can be stabilised (Ahn, C.Y, et al 2017). The proper allocation of resources will remove any chance of confusion and it becomes easy for the managers to ascertain the individual costs quickly.

Recommendations for ABC model implementation

At times the choice of both the activities and the drivers of the cost might be inappropriate. Therefore the company should improve the ABC model to analyse the loopholes and shall convert the non- potential areas into the potential ones (Saghafifar and Poullikkas, 2017). The right driver shall be associated with the right activity to ensure the proper segregation and also to maintain a hierarchy of the categories.

This is the tool of management in which the budget of the organisation needs to be prepared for planning and control of fund. All the budgets are made with the historical data and expectations from the future. After this a budgeted data is compared with the actual accounting data and the performance is calculate don the basis of the variation between the actual and the expected performance. The budgets are also useful in giving in-depth understanding of where your money is being spent. It also helps to reduce the troubles of the debt. If the debts are already to the control it will become cumbersome to implement the budget. Therefore, a budget is like a blue print of the organisation’s revenue and the expenditure. This eventually helps in examining the total funds available for the company to expense on the investments. It shall be used by the Trilogy International Limited since its business is dealing into different segments like organic products d fresh fragrances. Therefore a budgetary control will help in determine the utilisation of funds in which market segments.

Conclusion

Therefore from the above analysis it can be concluded that the Trilogy International Limited shall focus on its existing structure as well take a step to improve the performance with the use of the managerial tools. The implementation of the ABC model is likely to accelerate the performance of the business in association with other relevant improvements.

References

Ahn, C.Y. et al (2017) Analysis of Vision Statements in 6th Community Health Plan of Local Government in Korea. Journal of Agricultural Medicine and Community Health, 42(1), pp.1-12.

Angelopoulos, M. and Pollalis, Y., (2017) Using ABC costing method with in a KPI-based framework to a Lean transformation of a Greek Public Company.

Financial Web (2017) [online] Available from https://www.finweb.com/financial-planning/the-importance-of-budgeting.html [Accessed on 22nd May 2018].

Flink, C.M. (2017) Ordering Chaos: The Performance Consequences of Budgetary Changes. The American Review of Public Administration,10(2), pp 13-25.

Freiesleben, J. (2014) On the limited value of cost of quality models, Total Quality Management and Business Excellence, 15(7), 959-969.

Frimpong, E.A., Ameyaw, F. and Osei-Bonsu, E. (2017) Budgeting And Budgetary Control Practices in Timber industries in Ghana: A Case of Logs and Lumber Limited. International Journal of Technology and Management Research, 2(2), pp.44-50.

Fyall, R., Moore, M.K. and Gugerty, M.K. (2018) Beyond NTEE Codes: Opportunities to Understand Nonprofit Activity Through Mission Statement Content Coding. Nonprofit and Voluntary Sector Quarterly, 12(3), pp 15-32.

Howell, S.B. et al (2014) The K2 mission: characterization and early results. Publications of the Astronomical Society of the Pacific, 126(938), p.398.

Innes, J. and Mitchell, F., (2015) A survey of activity-based costing in the UK's largest companies, Management accounting research, 6(2), pp.137-153.

Kirkpatrick, S.A., 2017. Toward a Grounded Theory: A Qualitative Study of Vision Statement Development. Journal of Management Policy and Practice, 18(1), p.87.

Manunen, O. (2013) An activity-based costing model for logistics operations of manufacturers and wholesalers, International Journal of Logistics, 3(1), 53-65.

Otley, D. (2015) in Management Control. Critical Perspectives in Management Control, p.27.

Plank, P. (2018) Introduction. In Price and Product-Mix Decisions Under Different Cost Systems, New York: Springer

Saghafifar, M. and Poullikkas, A. (2017) Comparative analysis of power augmentation in air bottoming cycles, International Journal of Sustainable Energy, 36(1), pp.47-60.

TIL(2018) [online] Availbale from https://www.trilogyproducts.com/media/pdf/Trilogy%20International%20Ltd%20Annual%20Report%202016.pdf [Accessed on 23rd May 2018]

Vaxevanidis, N. M., and Petropoulos, G. (2018) A literature survey of cost of quality models, Journal of engineering, 6(3), pp. 274-283.

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E. (2015) Managerial accounting.London: Wiley.