Management Accounting Coursework on Activity Based Costing - Case Study

Literature Review on Activity Based Costing

Your Coursework of Management Accounting is on Activity Based Costing, I have attached the Case Study required for you to be able to complete your 2,000 words essay on the topic. Your 2,000 words essay should work round the following questions on Activity Based Costing (ABC).

Throughout the implementation, maintenance, and update of the model, the ABCM implementation team focuses on a set of guidelines that encourage them to:

• Understand the strategic nature of the business.
• Obtain top management support.
• Clearly define goals and objectives.
• Forni cross-functional teams.
• Build internal expertise, and not rely exclusively on complex software and external consultants.
• Empower team members.
• Focus on changing behavior.
• Focus on long term continuous improvements.

ABCM enables managers to view labor, overtime, and support as they are “absorbed” by the different manufacturing activities. Activities that absorb labor, overtime, and support can be categorized as value added or non-value added. In principle, ABCM will point to the elimination of “non-value add” activities, rather than unilateral headcount reductions as a cost saving strategy. For example, ABCM might help identify a rework area as the site of non-valued added activities and then, utilizing the same workforce, focus effort on eliminating rework. It is this logic that makes ABCM a potentially important subject of study for labor and management leaders.

As the following example illustrates, ABCM gives the manufacturing manager the power to target processes for elimination or improvement. Thus, the manufacturing manager can identify specific activities with lean initiatives designed to reduce the cost of the non-value added activity. Ultimately, ABCM could tie together the whole organization and begin to nurture a culture based on waste elimination, response time reduction, product and process design simplification, and quality improvement.

BCAG Wichita began its ABCM efforts by working to analyze and strengthen its own process accounting system. Some areas that neededimprovement are identified below.

• Costs were not allocated based on a cause and effect relationship. In fact, the system generally overemphasized direct labor costs while not accounting for the impact of manufacturing volume and product complexity. Using ABCM tools, the division introduced activities as metrics for determining the true ownership cost of a product by determining the amount of resources absorbed by particular production activities.
• The current accounting system was limited to production costs and did not account for general or administrative costs. Additionally, customer and supplier costs were also not easily identified using information contained within the process accounting system. For example, using ABCM production managers can identify the true ownership of costs in situations such as when parts are offloaded to vendors, which might introduce potential delays or quality issues.
• The current accounting system contained information primarily designed to satisfy the needs and requirements of outside customers (i.e.: shareholders, SEC, 1RS, etc.) and did not focus on the collection of data that facilitates operational analysis. ABCM rectified this problem by providing cost data on a timely basis that is useful from operational decision-making purposes.

A manager at BCAG summarizes the division’s hopes for widespread implementation of ABCM practices as the ability to: Identify, reduce, or eliminate non-value added costs (including those activities that are essential, but non6 value added) without deterioration to product quality value, or performance.

Boeing Wichita believes that the above goal is achievable because it firmly believes that ABCM enables the facility to accomplish the following:

• Form an understanding of the cause and effect relationship between cost and behavior.
• Create a cost effective means to identify opportunities for improvement.
• Prioritize and track the progress of continuous improvement initiatives.
• Establish what-if and sensitivity analysis of business processes.
• Reduce inefficiencies and estimate future activity and process costs.
• Allow a cost view that will influence product design and development decisions.
• Increase capacity.

With these changes, BCAG Wichita feels that the implementation of ABCM will enhance its ability to compete for future Boeing Company Work. Additionally ABCM can increase the division’s ability to meet future accounting and economic profit goals that will return value to  shareholders and the company as whole. The following examplesillustrate how ABCM was implemented at BCAG Wichita. These are actual documented events from different areas of the division, Light Structures and Structural Bond, where specific goals were achieved through activity based costing processes.

(a) Review the academic literature on Activity Based Costing and explore how this overhead absorption technique evolved and what the literature says of its development and how companies are adopting the method. 1,000 words

(b) What stakeholders would be most likely to support the use of ABC system and who among these stakeholders most likely to find the system most threatening? 500 words

(c) From what you have read in the case study provided, do you have enough evidence to decide whether you would support or oppose the introduction of an Activity Based Costing (ABC) system in an organization, you are likely to work for after your degree? 500 words

An ABCM model is designed to accommodate each of the facility’s major business units, including support, engineering, tooling, fabrication, and assembly. Resources map to activities via the primary, secondary, or tertiary activity costs, which subsequently map to end items or parts produced in each of the major business units.