ABC Model: Characteristics and Relevance to Brambles Limited
Discuss About The Hospitality Finance Managerial Accounting.
In this report, efforts have been made to bring into light the different aspects of the activity based costing (ABC) system. The purpose of the report is to relate the use of the ABC system with a business organisation listed on the Australian Securities Exchange (ASX). Therefore, the organisation that has been considered for meeting the purpose of this report is Brambles Limited having the ASX code of BXW. It is founded in the year 1875, when it started a butchery business; however, with the passage of time, it has shifted to transport and logistics. It is a specialised supply chain logistics group involved in pooling unit-load equipment and related services. The report would provide information regarding the different ABC model aspects including its description, features and process of implementation supported by suitable recommendations.
From the business perspective, ABC is considered as a significant costing approach aiding the business organisations to identify those activities necessary for running their business operations. Once such activities are identified, it assigns the indirect costs to the concerned products or services. Thus, it is evident that ABC model determines the relationship among costs, products and activities, as it is necessary to allocate indirect costs to the products or services in an effective manner as opposed to the conventional costing approach (Butler and Ghosh 2015). However, the business managers are often encountered with certain complexities in allocating some particular indirect costs to the products or services in this costing system. One such instance could be identified as the staff salaries, in which issues are faced while assigning costs to the services rendered. On the other hand, it is noteworthy to mention that ABC model supplies the necessary cost information for which it has become popular among all types of business organisations regardless of their size and industries (Cannavacciuolo et al. 2015). There are some areas where ABC system plays a major role and they are profitability analysis of product line, target costing, customer profitability analysis and others. Thus, the ABC model is applicable for all the business sectors irrespective of their size and nature.
- By applying the ABC model, the total costs of the organisations could be broken down into variable costs as well as fixed costs. Such cost division makes it possible for the business enterprises to implement relevant pricing strategy depending on their cost operations and industrial trends (Dopson and Hayes 2016).
- Another significant characteristic of this model is that the firms could compare the cost behaviour pattern in their overall costing operations.
- The business entities are benefitted immensely from this model, since it relates the cost behaviour pattern with certain aspects that include time, diversity, volume and other cost events.
- The ABC model assists in identifying the cost drivers for tracing the costs of overheads to the products (Edmonds et al. 2016).
- It becomes easy for the managers of the organisations to dictate the patterns of cost behaviour by using the different drivers of cost.
Figure 1: Activity based costing model
(Source: Eldenburg et al. 2016)
From the above evaluation, it has been found that the ABC model enables the business enterprises to accomplish their corporate goals and strategies. This section would lay stress on evaluating the mission, objectives and corporate strategies of Brambles Limited and then they would be linked with the ABC model.
Evaluation of Brambles Limited’s Mission, Objectives and Corporate Strategies
Brambles Limited has set out a clear purpose for carrying out its business operations. The mission of the organisation is to provide fast and timely services to its global customers. However, it has established three major business dimensions, which include responsibility, safety and sustainability. Due to this reason, the organisation is dedicated to work in collaboration for ensuring the growth and value development for its shareholders (Brambles Corporate Site 2018).
Besides, the organization has certain particular objectives as well. The initial objective is to ensure the health and safety of its staffs by formulating certain safety standards and principles. The second objective includes the accomplishment of the business objectives and targets by working collaboratively. The final objective is to ensure business integrity and mutual respect to its related stakeholders.
Brambles Limited has a group of business activities, which are the significant drivers of its business operations. According to the significant strategies, the intention of the organisation is to be the trusted partner of the client choice by developing and delivering services associated with blasting and civil mining. This is essential for the organisation to increase its productivity, while making the management aware of the critical risks. Due to this reason, the significant strategy of the organisation is to work collectively for accomplishing the objective. By using these strategies, Brambles Limited is able to maintain its competitive position in the transport and logistics industry.
ABC model’s popularity could be observed in few particular industries such as the manufacturing industry, mining industry, transport and logistics sector and others. In this context, it needs to be stated that Brambles Limited is a specialised supply chain logistics group involved in pooling unit-load equipment and related services. Due to this reason, it creates an opportunity for the organisation to obtain benefits by implementing the ABC model, as its business goals and objectives could be accomplished (Gitman, Juchau and Flanagan 2015).
The enforcement of the ABC model in Brambles Limited would categorise the transport and logistics activities into five main categories. These categories include processing activities, input activities, administrative activities and support activities for providing support to the first two activities. By implementing the ABC model, the management of Brambles Limited could segregate the tasks into activities for managing the costs associated with these assets in the most appropriate fashion (Greenberg and Wilner 2015).
The implementation of ABC model in Brambles Limited would realise five different levels of activities, which include unit-level activities, batch-level activities, product-level activities, facility-level activities and customer-level activities. The unit-level activities occur at the time during the production of each container in the organisation. The batch-level activities would be present at the time the organisation would perform the process of production in unit groups. The product-level activities help in extending support to the manufacturing procedure of the organisation for particular products and services. In order to benefit the overall process of production, the facility-level activities would be used (Klemstine and Maher 2014). As a result, this model would enable Brambles Limited to assist in the categorisation of repetitive as well as non-repetitive activities of production.
Implementing ABC System in Brambles Limited
Another function of the ABC system within the organisation is to form association between the cost drivers and cost activities. The cause and effect association could be developed with the assistance of the cost drivers and from this association, the cost objectives could be formulated as well. By obtaining assistance from the resource drivers, the management of Brambles Limited would be able to gauge the quantity of goods despatched, which is consumed on the part of each activity. On the contrary, the activity helps would enable the organisation in gauging the frequency and demand intensity based on the ABC system (Krishnan 2015).
However, while implementing the ABC system, it is obvious that the cost accountants of Brambles Limited would be confronted with certain issues in choosing the cost drivers, since trade-off accuracy needs to be made as opposed to the complexity of the ABC model. Due to this, all the identical cost drivers need to be grouped in a single cost pool. After the end of this procedure, the management of Brambles Limited is required to make application of the cost pools in the product line by applying the cost driver rates based on the number of cost driver transactions (Klychova, Faskhutdinova and Sadrieva 2014).
By applying the above-mentioned processes in accordance with the ABC system, the managers of the organisation would obtain all the necessary costing information regarding the overall manufacturing system. When all the needed costing information is present, the managers of Brambles Limited would be able to optimise the product costs that would enable in accomplishing the organisational goals and objectives.
- Firstly, for assuring effective enforcement of the ABC system, it is advised to the top management of Brambles Limited for extending support to the organisation. Hence, it is necessary for the organisation to take into consideration that the cross-functional team for managing all the aspects associated with the enforcement of the ABC model. Due to this reason, the higher-level management of Brambles is required to provide all the needed resources to the cross-functional team for effective implementation of the ABC model within the organisation (Oseifuah 2018).
- Two significant influential dynamics are present due to which the top management of Brambles Limited is suggested to extend support to the enforcement of the ABC system. When there is no significant support from the management of the organisation, the major impediment would be the resistance of the employees towards change. In addition, the staffs of Brambles Limited might not provide adequate importance to the ABC model when they could not seek support from the top management (Park and Jang 2014).
Various alternative management accounting tools are available besides ABC model. Out of them, Brambles Limited could seek the alternative of adopting budgetary control, as it would become possible to plan and control different business activities by using this management accounting tool. By enforcing the budgetary control, the management of Brambles Limited could plan, monitor and control the various business activities of the organisation (Warren and Jones 2018). Some of the significant benefits of budgetary control are described briefly as follows:
- It becomes possible for the business enterprises to increase the efforts of their employees for accomplishing their business strategies and objectives (Warren, Reeve and Duchac 2015).
- If the budgeted expenses are more than the actual expenses of the business organisations, it helps the management to obtain the scope of undertaking remedial actions so that the situation could be rectified.
- By implementing the budgetary control in the business operations of the organisations, the management could gain adequate information regarding the previous events, since the management could formulate effective strategies in presence of this information for assuring that such mistakes are not repeated in future (Weygandt, Kimmel and Kieso 2015).
Conclusion:
From the above discussion, it is inherent that the global business enterprise irrespective of their industry, size and nature are implementing the ABC model in order to improve their overall costing system. It has been identified further that the enforcement of the ABC model enables the organisations to divide the total costs into variable costs and fixed costs. Along with this, the management of Brambles Limited could obtain all the necessary costing information by using the ABC system. This is because such system would enable the organisation in to formulate suitable techniques of costing. Along with this, for assuring the suitable adoption and enforcement of the ABC system, the higher-level management of the organisation needs to extend support the overall process.
Recommendations for Management
The enforcement of the ABC model in Brambles Limited would categorise the transport and logistics activities into five main categories. These categories include processing activities, input activities, administrative activities and support activities for providing support to the first two activities. By implementing the ABC model, the management of Brambles Limited could segregate the tasks into activities for managing the costs associated with these assets in the most appropriate fashion the managers of the organisation would obtain all the necessary costing information regarding the overall manufacturing system. Based on the above evaluation, it could be observed that the business enterprises could adopt the budgetary control in the form of alternative technique of management accounting. This is because it would allow Brambles Limited to ensure proper planning and controlling of the overall business functions, activities, processes and operations.
References:
Brambles Corporate Site., 2018. Brambles. [online] Available at: https://www.brambles.com/ [Accessed 25 May 2018].
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.
Cannavacciuolo, L., Illario, M., Ippolito, A. and Ponsiglione, C., 2015. An activity-based costing approach for detecting inefficiencies of healthcare processes. Business Process Management Journal, 21(1), pp.55-79.
Dopson, L.R. and Hayes, D.K., 2016. Managerial accounting for the hospitality industry. Wiley Global Education.
Edmonds, T.P., Edmonds, C.D., Tsay, B.Y. and Olds, P.R., 2016. Fundamental managerial accounting concepts. McGraw-Hill Education.
Eldenburg, L.G., Wolcott, S.K., Chen, L.H. and Cook, G., 2016. Cost management: Measuring, monitoring, and motivating performance. Wiley Global Education.
Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson Higher Education AU.
Greenberg, R.K. and Wilner, N.A., 2015. Using concept maps to provide an integrative framework for teaching the cost or managerial accounting course. Journal of Accounting Education, 33(1), pp.16-35.
Klemstine, C.F. and Maher, M., 2014. Management Accounting Research (RLE Accounting): A Review and Annotated Bibliography. Routledge.
Klychova, G.S., Faskhutdinova, ?.S. and Sadrieva, E.R., 2014. Budget efficiency for cost control purposes in management accounting system. Mediterranean journal of social sciences, 5(24), p.79.
Krishnan, R., 2015. Management accountant—What ails thee?. Journal of Management Accounting Research, 27(1), pp.177-191.
Oseifuah, E.K., 2018. Activity based costing (ABC) in the public sector: benefits and challenges. Management, 12, pp.4-2.
Park, K. and Jang, S., 2014. Hospitality finance and managerial accounting research: Suggesting an interdisciplinary research agenda. International Journal of Contemporary Hospitality Management, 26(5), pp.751-777.
Warren, C.S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.
Warren, C.S., Reeve, J.M. and Duchac, J., 2015. Managerial accounting. Nelson Education.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John Wiley & Sons.
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