Contemporary Management Technique: Activity-based Costing And Management

Rationale for activity-based costing and management

The management techniques are essential for any business top to remain consistent, focus on accuracy, clarity and thoroughness in their communication. They are useful to set aim in working as a team, reward and recognize the hard work publicly. Further, they are helpful to stay transparent as much as possible and encourage every ideas and opinion (Mandigo et al., 2015).

To understand the situation better, the American Public Health Association or APHA is selected here. It is situated in Washington, D.C. and serves various professionals involved in public health. They have been speaking out for multiple policies and problems for public health. They have focused on developing the health of the public and gained equity under health status.

Here, the activity-based costing and management. Firstly, the overall idea is demonstrated. Then the technique is analyzed in details. Here the methods are described and implementation processes are evaluated. Then its deployment processes by other firms and applicability for APHA is highlighted. Lastly, the plan for deployment of activity-based costing and management examined in this study.

The Management accountants are the professionals accounting and finance professionals. They are involved in developing and using cost management information. This is to assist in implementing the overall organization’s strategy. Further, the cost management information has been comprising of different financial data regarding revenues and costs along with non-financial data about productivity, entire customer retention, effective quality and various primary success factors of the business (Blocher et al., 2016). The cost management deals with the development of the usage of various types of cost management information.  Here, the overall strategic role of the different accountant involves the partnering various elements. This includes decision making of management, planning of devising and various types of performance management systems. They provide expertise in controlling and financial reporting (Kaplan & Atkinson, 2015). This is been seen to assist the overall management. This is to be done in the deployment and formulation of the strategy of every type of organization. The management accountants are always to be found to be using their distinct expertise like performance management, planning, decision making. This has been used for working with the managers of organizations, helping organizations to get success in formulating and deploying the strategy (Kaplan et al., 2014). The information on cost management is created and utilized under the information value chain or the business through various stages as illustrated below.

Figure 1: “Different stages of information value chain”

(Source: Blocher et al., 2016, p.3)

Under the lower stages of a value chain, the management accountants are found to collect and summarize the data from various types of business events. They have been modifying the data unto information. This is done through analyzing and using the expertise of various types of management accountants. Moreover, it is seen that at stage 4, the news gets assimilated. This is done with various kinds of information. This is done for the strategy of the organization along with the competitive environment. This is to generate useful and actionable knowledge. At the last step, the accountants are found to utilize the knowledge to participate with the teams of management. This is to make strategic decisions advancing with the strategy of the company (Christopher, 2016).

The strategy behind activity-based management

In any common management of an organization, the accounts are found to be reporting to the controllers. Different types of management accountants further assist these controllers. They have a broad range of liabilities. This includes various reporting functions, maintaining information systems, financial reporting and cost management. Here, the CFO or chief financial officer takes the entire responsibility for the economic purpose.

Figure 2: “An Organization Chart displaying various Functions of the Controller”

(Source: Blocher et al., 2016, p.4)

The activity-based costing and management comprise for the following functions.

Strategic management :

The information about cost management is required to undertake effective strategic decisions. This about the choices of products, methods of manufacturing, marketing channels and techniques and analyzing the profitability of customers and additional long-term challenges.

Decision and planning:

The information on cost management is required for supporting various kinds of recurring decisions. These are done about replacing equipment, various types of cash flow management. This also includes the purchasing of budgeting raw materials pricing and various production of scheduling (Dale & Plunkett, 2017).

Operational and management of controls:

The information on cost management is required to deliver an effective and fair basis. This is to determine various inefficient operations and motivate and reward the most efficient managers of the company.

Developing financial statements:

 The information found on cost management is been required. These are needed to supply various types of accurate accounting for inventory and various other types of resources. Moreover, this has been in compliance with multiple types of reporting requirements. This is to prepare economic reports and use various other functions of management (Christopher, 2016).  

The rise in pressure of global competition, economic recession, changes in business process and technological innovation are found in making cost management more dynamic and crucial that the past. Thus contemporary managers must be thinking competitively. The thinking includes anticipating operating, services, products and processes that are developed in accommodating various expected changed for customer demands (Blocher et al., 2016). Here, flexibility is a vital factor. This ability to create quick changes. This are to be done in critical situation. This is the result of application of various types of management ideas of flexible manufacturing, speed-to-market and e-commerce. Contemporary success has been no longer the measurement of the ultimate victory. Here, the managers are found to be driving the company. It is done through the help of windshield and never with the actual-view mirror. Here, the overall strategic emphasis must be including multiple types of creative and integrative thinking. This is determining of resolving issues from a cross-functional view-point.

Further, the strategies emphasis has been needing integrative and creative thinking. This includes the capability of identifying and resolving challenges from a effective view-point which is cross-functional. Also, the overall functions of business are determined through accounting for controllership, finance, production and marketing. Rather than seeing the issue as a problem of production, a question of marketing and accounting and finance issue, the cross-functional teams have seen that from a smart and integrative method. This has been assimilating every competitive skill at the same time. This integrative step is needed under the competitive and dynamic scenario. The attention of the firm has been to stay focused on various satisfying needs of required customers and various types of resources of the firms (Dong, Liu & Lin, 2014).

Comparing the previous and contemporary business environments of activity-based costing and management:

This is demonstrated below:

Competition:

The previous business management has been focusing on economies of standardization and scales.  The contemporary business management has been focusing on customer satisfaction, functionality and quality

Process of manufacturing:

 The previous business management has been focusing high volumes. This also included various long runs and notable levels of in-process. Further, it has also included finished inventory and is known as the smart push approach. The contemporary business management is focusing over low volume, short production runs, reduction of inventory levels (Blocher et al., 2016).

Emphasis on quality:

 The previous business management has been accepting usual and reasonable amount of waste. The contemporary business management is aiming the zero defects.

Marketing products:

 The previous business management has been determining relatively fewer variations and longer product life-cycles. On the other, at contemporary business management huge number of changes are managed with short product life-cycles.

Recording and reporting information:

 At previous business management the financial data are almost exclusive. The contemporary business management the strategic success factors are more emphasized.

Management focus:  

The previous business management the emphasis is given in short-term compensation and measures. Here, in contemporary business management more emphasis is put on long-term and critical success factors, and commitments towards stakeholder value (Blocher et al., 2016).

Identifying costs:

 This is to determine what is needed to allocate. For instance, as one needs to find out the total cost of a distribution channel, one can recognize the warehousing and advertising costs that are related to the circuit (Noreen, Brewer & Garrison, 2014).

Loading secondary cost pools:

This includes creating cost polls for the expenses. All of these are incurred to provide various types of services towards various sections of the organization.

Loading primary cost pools:

This includes creation of set of cost pools. These are for those where the overall costs are been aligned to produce service and goods.

Measuring activity driver:

 Using systems of data collection. This is for gathering data about the activity drivers. These are used for allocating costs in pools of secondary costs to pools of primary expenses.

Allocating expenses in secondary polls to the primary election:

 Here activity drivers are used.

Charging costs to cost objects:

 Here, various activity drivers are used. These are done to allocate various contents of every fundamental cost pools to various important objects (French et al., 2016).

Formulate reports:

 Here, the outcomes of activity-based cost systems are converted to reports for consumption of management.

Acting of information:

 Here the most common and effective reaction for the activity-based cost report has been to decrease the number of activity drivers. These are used by every kinds of cost object (Blocher et al., 2016).

There are various approaches to be taken to design and implement the ABC system. Here, no generic method has been universally suitable. However, to obtain the proof of concept, various large companies have been using the approach of the pilot project. This is deployed through real expenses and revenues. Here, the pots of cost attachments points are determined and various activity costs are measured. Besides, a fast prototype with an approach of iterative remodeling is also a practical approach. Using the approach helps companies to gain a new awareness of designing of cost systems across the company, providing the capability to adopt the methods. This also includes using the developed information to develop the performances (Laviana et al., 2016). However, it must be reminded that ownership of activity-based cost system must be consistent with the primary aims.

Different competitive firms have been including the anticipated and emerging changes in the current business to business practices and planning. This competitive firm is driven by customers, using advanced information and manufacturing technologies as appropriate. It has been anticipating the impact of changes under customer tastes and regulatory requirements. Further, they have been identifying the cultural, political and social environments (Akhavan, Ward & Bozic, 2016). This, been guided by various strategic thinking, it is seen that the management accountant has been focusing on various factors. This is to make the company successful instead to depend on costs and economic measures. Multiple stages of developing cost management system have been describing the shift in the overall focus.

Stage 1: The systems of smart cost management are the basic systems of reporting of transactions.

Stage 2 :  While the companies have been developing the second stage, the systems of cost management has been concentrating the external reporting of finance. Here the aim has been found to be reliable on financial reports. Thus the usage of cost management is found to be restricted.

Stage 3: The management of cost system has been tracking the primary operating data and create more accurate and related cost information for decision making (Blocher et al., 2016).

Stage 4 : The appropriate cost management has been found to be an essential element of the system in strategic way. Here the initial two steps of cost system development have been concentrating over measurement of management accountants and role of reporting. Here, the third stage has been shifting towards the numerous types of operational control. At the last scene, it can be seen that the ultimate aim of different management accountant has been the fundamental element of management.

Here, this indicates the measurements of the aspects of the performance of the companies that are vital to the competitive advantages and thus the success. Here, most the success factors have been financial. Moreover, CSFs has been depending on the kind of the competition it was facing. The management accountants have guided by strategic focus has reacted to various changes in a contemporary environment of business. These are helpful to deploy the strategy under the dynamic times. Besides, the methods have been directly focusing on strategy implementation (Najjar, Strickland & Kaplan, 2017). Furthermore, the following steps have been to achieve implementation through concentrate on improvement of process and various types of enterprise risk management. This also includes enterprise sustainability and various types of theory of constraints along with lean accounting. It has also included total quality management and various kinds of business process development along with benchmarking.

In current decades, various types of complicated activities and significance of cost price in APHA for governments and managers are found to be rising. To understand the changes and analyzing the effects on cost prices are vital. Conventional costing tools particularly methods utilized in APHA are never practically meeting the expectations (Kaplan et al., 2014). Here, the means have been finding out the cost prices that are offered service based over specific prices irrespective of the conditions in the hospitals. Due to this reason, the method of activity-based costing is able to be deployed to calculate the total cost price. The activity-based costing and management are one of the innovative methods of costs under the rise in application across the world. Here, the plans are helpful to calculate the cost price, deploy complexity, diversity and particular features (Blocher et al., 2016).

The individual elements of the method id the capability in diagnosing the specific costs and present economic information. This develops the efficiency and performance of activities. Further, through implementing activity-based costing and management at APHA, the capacity resources can be decreased and diagnosed. Through introducing activity-based costing and management at APHA, the accuracy of various calculated costs in health systems are helpful to become vital for hospital managers, governments, investors, physicians. Here, the outcomes have shown that activity-based costing and management is useful as the effective method in APHA (Kaplan et al., 2015). Therefore, the primary elements of applicability to APHA includes the following.

Making comparing over enacted tariffs with activity-based costing and management methods for remedy services.

• Providing information to various standardized activities and appraisal of different benchmarking and performances.
• Presenting relevant information for hospital budgeting for APHA, particularly activity bases budgeting.
• Defining various activity centers.
• Activity analysts in activity centers
• Finding the output for every center.
• Measuring activity of center costs.
• Allocating costs of various administrative centers for different activity centers.
• Measuring the cost price of various services.
• Here cost price of the remedy activities are calculated.

Here, the costs of hospitals have been determined predominantly by APHA’s personnel costs. Due to the differences of tariffs and cost price of hospital services, here most parts of the hospitals are losses and government has been forced in subsidizing them. Hence, the model of activity-based cost model is the practical tool can be used to analyses the real cost structure of APHA (Kaplan et al., 2015). The activity-based cost determines the helpful data about the combination and amount of services of cost prices. Thus, APHA must consider the use of information on cost price on activity-based costs to determine the tariffs for their services (Hall et al., 2015).

The various strategies for deploying the activity based values are demonstrated hereafter.

Step 1:  Separating hospital based in services:

 The overall hospital is been divided to various parts. This has been coming from different offered services for the patients. The first one is named as operational division. In this way they have been providing services to different hospitalized patients like emergency units, heart surgery, operating rooms and recoveries. Then there are diagnostic divisions. They have been providing diagnostic service o various hospitalized patients radiology and laboratory and so on. Next, there are administrative and service divisions. The units have been preparing facilities and offering service to different hospital units like administrative, management and accounting units (Erhun et al., 2015).

Step 2:  Analyzing and defining activity centers:

 At this step, various needed activities have been providing services to different identified patients. For example, the activities related to function in the surgery department like batch level and unit level units are shown. Here, the surgery operation comprises of various events that need multiple sources that includes numerous expenses.

Step 3:  Defining activity centers:

 It must be reminded for APHA, that at administrative units, the service to patients is being offered directly. Next, from assigned duties at APHA, the subdivision is seen as the activity centers. Here, for instance, the accounting department is categorized into various activity centers. The first one is patient accounting, salary accounting and proper capital accounting. Hence, the costs are not allocated to those activity centers. The activity centers of patients accounting has been providing service for various released patients (Yang, Lee & Chen, 2016). Therefore, it has been evident that every cost of the centers are allocated to discharge parents or cost object. Besides, the salary accounting activity center has been accounting the salary of personnel in APHA. Hence the cost is assigned to the staff of the division.

Step 4:  Activity analysis in various activity centers:

 Here the reason behind the activity analysis is to retrieve needed data about the types of activities, activity levels and purposes of activities, resources and time of accomplishment of activities. This is vital for fundamental and essential stage in activity-based cost method. At this stage, the event-related goals are determined. Besides, the amount of materials consumes and the depreciation of equipment is measured (Erhun et al., 2015).

Step 5:  Calculation of activity center costs:

 Through using information of the overall activity analysis and the data of accounting, the expenses of every kinds of activity-centers comprises of various equipment depreciation, human resources and material costs. These are identified from unit level, hospital level sustainable level costs and hospital level.

Step 6:  Allocation of costs of centers of administrative activities:

 Irrespective of use of various bases to allocate different costs in activity-based cost method, the simultaneous equations are helpful to find out service leads at every activity center. At last, the expenses allocated for various activity centers are seen to collect damages of every activity center.

Step 7:  Implementation of radiography:

 At this stage, the activities of radiography at APHA has included patient reception, radiography operations and preparing the ultimate service. Here, as per the overall cost activities, the cost price of the service is measured (Tsai & Jhong, 2018).

Step 8: Measuring the cost price of services:

 Here, the cost price of various remedial service or cost objects is to be calculated. This is from usage of various services at activity centers.

Conclusion:

The above study shows that the overall system of traditional costing has been found to be lacking. This has been eradicated through using activates the cost-based system. Apart from this, in various sections of APHA, the companies ate able to get more and more advantages than conventional costing system. This is the cause why APHA should be more systematic in utilizing the costing methods. The entire system on the other hand of the APHA has been performance based. This occur as the costing is activity bases and can be used by APHA. However, the activity-based costing systems never are never complicated. This is mainly as one needs better allocation of the overhead costs. This is instead the system for looking at the drivers of the costs and activities that the overhead costs has comprised of. Thus the study shows that activity bases management and value is pretty straightforward for APHA. Hence, the study helps in understanding the way in which activity-based costing has been a smart approach. This is towards the cost and includes monitoring the activities that includes tracing of resource consumption and costing of ultimate outcomes.

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