Activity-Based Costing
Explain how ABC model can improve the management accounting information available to its top management team.
The procedure of classifying, calculating, investigating, deducing and collaborating information for the chase of the objectives of the organization is known as Managerial Accounting. This accounting branch is also called as Costing Accounting. The major difference between financial and managerial accounting is financial accounting is focused towards offering information to the related parties which are outside the boundaries of the company whereas; Managerial accounting information is concentrated towards supporting managers of the company to make decisions. This report will help in understanding the concept of managerial accounting involving one of the tool i.e. Activity-based Costing. An explanation of the Activity-based costing and its features will be given. The report will answer how Activity Based costing support company in achieving its strategies for this mission and objectives of the Blackmore’s Company will be provided along with its corporate strategies. Besides this, the report will provide some recommendations that are important for the implementation of Activity Based Costing. Further, it will suggest one more tool of the managerial accounting that can be used in the organization.
Activity Based Costing is said to be a procedure for more accurately assigning overhead to the items that essentially use it. This system can be utilized for the directed decrease of cost of overhead (Accounting Tools, 2017). Activity-based costing tool operates extremely well in the environment which is complex, in companies where there is the production of various items and machines and twisted procedures that are not so easy to solve. Activity-based costing is also said to be a method of accounting that recognizes the firm activities that are performed and then allows indirect costs to the products cost (Wilikinson, 2013). ABC system (activity-based costing) identifies the relationship between products, activities, and costs, and by this relationship, it allows indirect costs to the products less randomly than out-dated methods (Wegmann and Stephen, 2010).
Few of the costs are hard to allot by this cost accounting method. Indirect costs, like office workers and management salaries, are at times hard to allocate to a certain product created. For this purpose, Activity Based Costing has been identified in the sector of manufacturing. ABC (Activity-based costing) is commonly used in the industry of manufacturing because it helps in improving the cost data reliability, therefore creating nearly-true costs and well categorizing the costs experienced by the company in the course of its procedure of production (Zeuner, 2012).
Features of Activity-Based Costing
This system of costing is utilized in the product costing, analysis of customer profitability, target costing, analysis of product line profitability, and service pricing. Along with this, it is very famous because companies can easily create a better corporate strategy and focus if costs are properly grasped.
- Activity-based costing offers a precise method of service or product costing, resulting in précis decisions related to pricing.
- Activity-based costing helps in increasing the knowledge of the overheads and drivers of costs and creates non-value adding and costly activities more observable, permitting executives to decrease or remove them (CGMA, 2013).
- It allows the enhanced customer and product profitability analysis.
- Activity-based costing helps techniques of performance management like balanced scorecard and continuous improvement (Salem and Mazhar, 2014).
- The overall cost is separated into two kinds that are a variable and fixed cost which is important to offer information which is of good quality in order to create a proper system of cost in the company.
- The patterns of cost behavior are related to events, volume, time, and diversity.
- The cost drivers imitate the pattern of cost behavior.
- The appropriate distinction is created among the patterns of cost behavior.
- The suitable drivers of cost need to be recognized for tracking the product overhead (Money matters, 2018).
Blackmore’s is one of the leading natural healthcare Australian Company. The quality range of minerals, nutritional supplements, vitamins, and herbals, and sustained provision of the environment and society are one of the reasons that Blackmore’s is said to be the most worthy and trusted company in natural health. The company is focused towards offering products that are natural healthcare and fulfill the standards of highest quality (Blackmores, 2014).
The Mission of Blackmore’s is to bring technology that provides advanced toolsets of new locator into the visual domain. They support strong, mission-critical environments, where straight detect 3D imagers are performance and cost limited. The company is determined towards offering high-quality standard products to their customers (Blackmore, 2018).
- Blackmore’s objective is to monitor the integrity and reliability of the financial information of the company to be comprised of legislative financial statements and reports.
- The objective is to handle open communication among external auditor, executive managers, and Committee
- Making recommendations to the Board for the selection/elimination and payment of a self-governing external auditor
- To regulate the framework of the risk of the company for documentation, valuation, organization, and control of risk
- To evaluate the performance of the external auditor of the company
The Blackmore’s is concentrated towards following its four major strategies i.e. consumer Centricity, Product Leadership, Asia Growth and Operational Effectiveness
Blackmore’s offers supplement brand and vitamin. It is one of the top Australian group with number one brand in Singapore, Hong Kong, Thailand, and Malaysia. The company is focused towards its customer’s health and care, therefore, it manufactures products that do not affect their health. Therefore, it has become one of the most trusted brands in Australia. The company is opening its services in different locations so that most of the people can make use of their health service, it has opened a top store at Bondi in Sydney which is named as Blackmore’s Wellness Centre (Interactive, 2017).
Besides this, the company also fulfill its corporate social responsibilities by conducting various programs for the people such as a program of corporate wellness which appealed around 3,000 people. Moreover, it also operates a Blackmore’s Running Festival.
The group has launched around 117 new products; it has also explored partnerships in medical cannabis through BioCeuticals. The company offers various products to the customers and it has launched a BioCeuticals in the USA, which is the world’s biggest practitioner market, by a foremost distributor. The Institute of Blackmore’s offer 25,000 professionals of healthcare with attributed training in all over the group in 2015. The group offers 447,816 education touch points.
The 50% of the Group’s sales are covered by the Asian customers and reflects the strong need for the brand of Blackmore’s. The Blackmore’s implement its most of their strategies in these markets so that it can increase its demand and sales. Besides this, the Chinese customers cover around $250 million of sales of the Group and the business of the group is continuously growing. Group has invested in Thailand with approx. 50 new advisors of in-store products.
Overview of Blackmore’s Company
The company has worked hard to double their capacity to overcome challenges of supply. The output of doubled production to fulfill growth and financed further in staff and automation. The company has extended its base of supplier comprising partnership of stronger suppliers. Besides this, it has invested a huge amount in the training of staff (Annual report, 2016).
The Activity-based costing improves the system of costing as it concentrates majorly on individual activities as the important cost objects. An activity is said to be an event, unit of work or task with definite purposes; for instance, setting up machines, distribution products, designing products, and operating machines. The activity-based costing can be implemented in the Blackmore’s Company as it involves various activities and manufacturing of healthcare services. The ABC will assist company is achieving its above-mentioned strategies more effectively i.e. Customer centricity, cost leadership, Asian growth and operational effectiveness. Some of the steps that will explain how it will assist in achieving the strategies:
Identification of Activities- In the initial step of the implementation procedure of Activity-based costing; the activities of Blackmore’s Company will be recognized and gathered in an activity pool. The pool of activities lie under various strategies implemented by the company is Consumer Centricity, product leadership, Asian group, and operational effectiveness.
Analysis of Activities- Activity-based costing will then move towards analyzing the group of activities and clearly identify the process which supports a service or product and ignoring few of the common imprecision of out-dated costing (Executive Finance, 2015).
Cost Assignment- Depending on the first and second step (identification of activities and analysis of the activities) cost are allotted to the activities group.
Calculation of Activity Rates- Early examination will be included in indirect provision labor. These actions or activities must be provided with a cost with accuracy.
Allotting cost to cost objects- The time when rates, costs, and pools are identified and defined, the next step is to assign cost objects. Objects are generally definite as the consequences provided to the consumer (E-Library, 2018).
Create and distribute reports of management- When the ABC is finished, that cost information should be used in a clear and brief way for the owners and cost objects (Purchasing and Procurement Centre, 2017).
In order to implement Activity-based costing in the operation of Blackmore’s, the company need to consider some important elements i.e.
- Before implementing any new tool or technique of management an operative change management procedure should be adopted. The objective of this procedure must be to confirm that there is support for every level of the company for the system.
- At all the organizational levels there should be a need for change. Along with this, the company should communicate the shortages of its current costing system.
Activity-based costing is one of the effective tools which is used by many organizations to improve their productivity and procedure (ELHAMMA and FEI, 2013). However, there are other various tools involved in the managerial accounting that can be used by Blackmore’s i.e. Time-Driven Activity-based Costing
The mission of Blackmore’s
Time-driven activity-based costing tool support organizations in shortening the process and getting rid of the needs of employee interview and survey for the resource cost supply to the actions or activities before taking them down to the cost object. This system assigns the cost of the resource directly to the objects of cost by using a simple framework asking for only two estimations. First, is it calculated the cost of delivering resource capacity and second is Time-driven activity-based costing make use of capacity cost rate to define the cost resource to cost objects by assuming the demand of resource capacity that all the cost objects require (Kaplan, 2007).
In the conclusion, it can be said that Activity-based costing is one of the effective tools of managerial accounting as it helps in allocating the cost of different activities along with resources. Moreover, Blackmore’s Company can implement this tool in its business operation to eliminate extra cost and enhancing the business procedures. The above report has presented all the important information needed to know how activity-based costing help in achieving strategies of the company. Besides this, it has suggested one more tool of managerial accounting i.e. Time-driven activity-based costing that Blackmore’s can use it in business. The report has highlighted some of the important aspects that are required i.e. concept of Activity-based costing and its features. Mission and objectives of Blackmore’s company and its global strategies has been explained that it use to increase sales and awareness among people.
References
Accounting Tools (2017) Activity-Based Costing [online]. Available from https://www.accountingtools.com/podcasts/ [accessed 21 May 2018]
Annual report (2016) Wellbeing [online]. Available from https://www.annualreports.com/HostedData/AnnualReports/PDF/ASX_BKL_2016.pdf [accessed 21 May 2018]
Blackmore (2018) Mission [online]. Available from https://blackmoreinc.com/mission/ [accessed 21 May 2018]
Blackmores (2014) About Blackmores [online]. Available from https://www.blackmores.com.au/about-us/company-information/about-blackmores [accessed 21 May 2018]
CGMA (2013) Activity-based costing (ABC) [online]. Available from https://www.cgma.org/resources/tools/essential-tools/activity-based-costing.html [accessed 21 May 2018]
ELHAMMA, A., and FEI, Z. (2013) The Relationship Between Activity Based Costing, Business Strategy And Performance In Moroccan Enterprises. Accounting and Management Information Systems, 12(1), 22-38.
E-Library (2018) The Steps to Implement ABC [online]. Available from https://ebrary.net/389/accounting/steps_implement_abc [accessed 21 May 2018]
Executive Finance (2015) Implementing Activity-Based Costing [online]. Available from https://executivefinance.nl/wp-content/uploads/2015/02/Implementing_Activity_Based_Costing11.pdf [accessed 21 May 2018]
Interactive (2017) Blackmores [online]. Available from https://interactivepdf.uniflip.com/2/41140/1086995/pub/html5.html?utm_source=website-article&utm_medium=link&utm_campaign=outbound&utm_content=annual-report-2017#page/1 [accessed 21 May 2018]
Kaplan, R.S. (2007) Time-Driven activity Based Costing [online]. Available from https://www.cwj24.cz/doc/Time-Driven-ABC.pdf [accessed 21 May 2018]
Money matters (2018) Meaning of Activity Based Costing (ABC) [online]. Available from https://accountlearning.com/activity-based-costing-meaning-features-objectives-implementation/ [accessed 21 May 2018]
Purchasing and Procurement Centre (2017) Six Critical Implementation Steps to ABC Costing [online]. Available from https://www.purchasing-procurement-center.com/abc-costing.html [accessed 12 May 2018]
Salem, S.E.A., and Mazhar, S. (2014) The Benefits of the Application of Activity Based Cost System – Field Study on Manufacturing Companies Operating In Allahabad City – India. Journal of Business and Management, 16(11), 39-45.
Wegmann, G., and Stephen, N. (2010) The activity-based costing method developments: state-of-the art and case study [online]. Available from https://halshs.archives-ouvertes.fr/halshs-00482137/document [accessed 21 May 2018]
Wilikinson, J. (2013) Activity-based costing [online]. Available from https://strategiccfo.com/activity-based-costing/ [accessed 21 May 2018]
Zeuner, P. (2012) Activity-Based Costing. 2nd edn. Germany: GRIN Verlag.
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