About ABC Model and its attributes
Discuss About The Ultimately Improve Cost Determination Process.
Aurizon Holdings Limited is the largest heavy haul freight operating Railway Company that is listed on Australian stock exchange. It is one among the top 100 ASX companies. The company provides its customers with integrated solutions relating to freight and logistics across an extensive rail and road network covering the entire Australia. It operates through its subsidiaries and owns one of the giant most coal rail networks that link around 50 mines along with 3 prime ports of Queensland. It transports different commodities like mining, agriculture, industrial products, coal, iron ores and retail goods as well groceries across the small or big towns or cities of the country. It also owns and manages Queensland’s central coal network that covers 2670 kilometres. Also, it provides several specialist services like rail designing and engineering, construction and maintenance and supply chain solutions. In this report, the application of activity based costing model on Aurizon Holdings Limited has been examined. Activity based costing is the key model of cost management accounting studies. Use of ABC Model can improve the quality of decisions of the managers of the company as it serves them with the relevant and useful information regarding the cost of the products and services in which the company is dealing so as to determine the customer profitability.
Figure 1: ABC Model for Rail Transport
Source: [https://real.mtak.hu/13104/1/1245034.pdf ]
Activity based costing (ABC) is an important model of advanced cost management system. It is used by the managers in their business organisations to assign appropriately the resources and overhead costs to the products and services on the basis of their consumption while producing or providing such goods and services. Under ABC model cost is majorly divided into two parts i.e. short-term variable costs and long- term variable costs. The allocation of short-term variable cost to the products and services is done in accordance with the cost drivers that are volume related. Cost drivers are the activities or factors that influence the expenses (cost) of the business operations (Özbayrak, Akgün & Türker, 2004). Direct material or labour cost, machine hours are few examples of cost drivers that are volume related. However, such cost drivers cannot be taken as the basis for allocation of variable costs that are long term in nature because these costs are driven by the nature of various business activities and not by the volume of consumption. Therefore, the basis of overhead cost must be understood in accordance with the various types of activities that are connected to production department or service department. In the following figure clear explanation of cost allocation to the products and services is given:
Attributes of ABC Model
Figure 2: Overhead Allocation under ABC
Source: [https://accountlearning.com/activity-based-costing-meaning-features-objectives-implementation/ ]
Following are some key attributes of the activity based cost model:
- The overall cost involved in the production of goods and services is primarily classified in two categories i.e. fixed cost and variable cost. This division of cost is required to provide appropriate information to develop a suitable costing system in any manufacturing concern.
- A proper differentiation is made for the different cost behaviour patterns.
- Cost behaviour patterns are mainly related to volume, diversity, events and time (Kaplan & Anderson, 2003).
- Identification of appropriate cost driver is necessary to trace the overheads related to a particular product or service.
- Cost behaviour pattern is mainly dictated by the cost behaviour patterns (Sengphanich, n.d.).
The main vision of the company is to become leading rail-transport business which partners with its customers for its growth.
To create significant values for its stakeholders such as its customers, shareholders, employees and the business community in which it operates its business.
To stay committed to the credit ratings offered by the grading agencies and further improving such investment grades by enhancing the efficiency and effectiveness of the business. The main objective of the business is to create sustainable values and returns for its customers and employees. The hallmark of the company is the sheer accountability for its business operations, continuous improvements.
To develop as well as to operate the multi-customer and rail based integrated supply chains. The main priority of the company is to further strengthen and grow its existing business in all the freight markets by relentlessly focusing on its customer base and by improving and enhancing its productivity. The company has a strategic planning of further diversification of its business portfolio by leveraging its capability into new products and rail freight opportunities in both national as well as international markets (Aurizon, 2018).
To achieve the above discussed mission and objectives, business of Aurizon Holding relies on strategic and advanced accounting methods to remain profitable in its competitive markets. The techniques and tools of advanced cost management system helps the company in collecting, analysing and evaluating its overall spending so as to streamline its business processes and to control and reduce the possible costs of the business (Hansen, Mowen & Guan, 2007).
Activity based costing is one of such important cost management techniques that plays significant role in enabling the corporations like Aurizon Holdings to achieve their corporate strategies and objectives (Kannaiah, 2015). These strategies are formulated for various objectives such as smooth survival and continuous growth of business, to provide global competitiveness to the business, creation of sustainable returns of the business and its stakeholders. All these objectives are achieved only when the company has successfully implemented and executed a sound cost management system. Costing system of any company enables its managers to take informed decision in regards to the pricing of the products and services delivered by it in the normal course of business. The product and service pricing mechanism of any company depends upon the adequacy of its overhead allocation cost on the basis of their consumption thereon. ABC methodologies not only enhance the profitability of the business through better pricing but it also facilitates saving important resources of the business. It allows the manager to effectively and efficiently use its resources to create value for the business. The model of Activity based costing is quite logical and therefore it provides the users with high end business solutions. The implementation of ABC Model in business improves the generation of higher revenues for the company by better cost determination processes. It helps the businesses in eliminating the activities that are redundant and unproductive.
Vision, mission and objectives of the Aurizon Holding Limited
Before the introduction of ABC Model, the cost of producing the goods and services of Aurizon Holding was determined on the basis of specific factors like labour hours, raw material units or quantity and various other sources of overheads. The implementation of ABC costing may be quite complex, expensive and time consuming as it requires proper training of the employees of the company who are functioning in the costing department and also the recruitment of new cost management expertise to implement such advanced cost management model in the business (Drury, 2013). However, the returns of the said model are much higher than the investment involved in its successful implementation. Its implementation requires every business activity that is substantial enough for the business, to be split down into its essential components. The basic step that is required to be taken to implement the ABC Model in the business is to identify the products and services that Aurizon Holding is dealing for the purpose of cost allocation (IMA, 2018). The next step after this involves identification of various direct and indirect costs that are associated with each of the important activities required to provide rail related services (Horngren, et. al., 2002). All the aspects such as railroad construction, freight operations such as loading and unloading of goods, locomotive maintenance and inspection, handling customer complaints and feedbacks etc. must be investigate (Ben-Arieh & Qian, 2003).
The main objective of implementation of ABC model in the business is to increase its overall profitability and performance through the identification of appropriate overheads costs and matching them with the suitable cost drivers. Thus, this model ultimately facilitates effective streamlining of business processes. With proper allocation of all the direct as well indirect costs to the suitable products and services, it gets easier for the management of the company to determine the overall cost involved in the producing different services. The correct cost determination of all the services provided by the company allows its manager to evaluate which business processes are operating profitably and which are not operating well. The streamlining of rail operations can be undertaken by allocation of more resources to the profitable segments and elimination of the activities that are excessively costly and not producing profitable outcomes (Bokor, n.d.). To determine the total price of a product or service, it is indispensible to determine the accurate cost involved in producing and providing the goods and services of the business. If prices of the goods and services are determined on the basis of inaccurate cost figures, the profitability of the business of the company will severely be affected.
Corporate strategy of Aurizon Holding Limited
To effectively implement the ABC Model in the business of Aurizon Holdings, the management of the company must hire the cost management experts possessing the requisite knowledge and degree to undertake the implementation of ABC technique in the company and to train and provide adequate skills to the existing personnel of the company to cope up with this advanced management accounting model. The employees of the company may resist to adopt such advanced technique of cost management as they are well versed from the traditional approaches of cost management. Therefore, the company must introduce some incentives and perks of using ABC methodology, for its employees.
Company can also appoint consultants or deploy the ABC technique supporting software so as to organise the information and facilitate effective coordination with the current accounting system. The said business software will not only support effective cost determination but also, they will save a lot of time and resources of the company (OHIO University, n.d).
As the company is aiming to enhance its profitability in the fore-coming years, it must consider the implementation of more advanced management accounting techniques in its business (Zimmerman & Yahya-Zadeh, 2011). Cost-Volume-Profitability (CVP) Analysis is one such key technique that can help the company to improve its profitability (ACCA, 2018). This technique helps the managers in determining the level of activity at which it must operate in order to achieve profits and avoid losses. This analysis mainly focuses on the effects of various levels of activities on the overall financial position of the company. It takes into account all the three aspects of production i.e. cost of the products and services, volume of the products and services and their profitability. Implementation of this technique would help the company in determining the adequate cost that must be involved in manufacturing and providing its goods and services in the market. Also, it will help the managers to determine the quantum of products and services performed to achieve the desired level of profitability. Under CVP analysis, the company can use Breakeven Point tool to determine the level of sales at which it will have ‘no profit and no loss’ situation and Margin of Safety tool to determine the level of sales after which company will start generating profits (Burritt, Hahn & Schaltegger, 2002).
Conclusion:
From the above report, it can be summarised that ABC model will certainly provide the company with possible solution to undertake sound decision making relating to cost management aspect of the business. After having the clear picture of all the activities involved in the railway transport company, the cost allocation will be carried out in the most transparent and accurate manner. This allocation will ultimately result in the best product and service pricing decision that, in turn, will generate higher profitability for the company. As a result of implementation of ABC Model in the business, Aurizon Holdings will be better able to control and manage its overall cost of production.
References:
ACCA, 2018. COST-VOLUME-PROFIT ANALYSIS, Available from: https://www.accaglobal.com/in/en/student/exam-support-resources/fundamentals-exams-study-resources/f5/technical-articles/CVP-analysis.html[ Accessed on: 07.06.2018].
Aurizon, 2018. Strategy. Available from: https://www.aurizon.com.au/company/strategy [Accessed on: 07.06.2018.]
Ben-Arieh, D. and Qian, L., 2003. Activity-based cost management for design and development stage. International Journal of Production Economics, 83(2), pp.169-183.
Bokor, Z., (N.d.) New Approaches’ of Cost Management In Rail Transport. Available from: https://real.mtak.hu/13104/1/1245034.pdf[Accessed on: 07.06.2018.]
Burritt, R.L., Hahn, T. and Schaltegger, S., 2002. Towards a comprehensive framework for environmental management accounting—Links between business actors and environmental management accounting tools. Australian Accounting Review, 12(27), pp.39-50.
DRURY, C.M., 2013. Management and cost accounting. Springer.
Hansen, D., Mowen, M. and Guan, L., 2007. Cost management: accounting and control. Cengage Learning.
Horngren, C.T., Bhimani, A., Datar, S.M., Foster, G. and Horngren, C.T., 2002. Management and cost accounting. Harlow: Financial Times/Prentice Hall.
IMA, 2018. Implementing Activity-Based Costing. Available from: https://www.imanet.org/insights-and-trends/strategic-cost-management/implementing-activity-based-costing?ssopc=1 [ Accessed on: 07.06.2018.]
Kannaiah, D., 2015. Activity Based Costing (ABC): Is It a Tool for Company to Achieve Competitive Advantage?. International Journal of Economics and Finance, 7(12), p.275.
Kaplan, R. and Anderson, S., 2003. Time-driven activity-based costing.
OHIO University, n.d. Using Activity-Based Costing (ABC) to Increase Profitability. Available from:https://onlinemasters.ohio.edu/blog/using-activity-based-costing-abc-to-increase-profitability/ [Accessed on: 07.06.2018.]
Özbayrak, M., Akgün, M. and Türker, A.K., 2004. Activity-based cost estimation in a push/pull advanced manufacturing system. International journal of production economics, 87(1), pp.49-65.
Sengphanich, U., n.d. The Characteristics Of The Activity-Based Costing Practice In Thai Manufacturing Firms. Available from: https://search.ror.unisa.edu.au/media/researcharchive/open/9915952052401831/53111928240001831 [Accessed on: 07.06.2018.]
Staub-French, S., Fischer, M., Kunz, J. and Paulson, B., 2003. A generic feature-driven activity-based cost estimation process. Advanced Engineering Informatics, 17(1), pp.23-39.
Zimmerman, J.L. and Yahya-Zadeh, M., 2011. Accounting for decision making and control. Issues in Accounting Education, 26(1), pp.258
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