Explanation of the model and the features
Discuss about the Economics Cost And Management Accounting.
During the use of the traditional accounting method, a major part of the indirect costs was consisting of the products manufactured. It later came to the firm’s realisation that the indirect costs were not having the equality in the consumption of the products which were manufactured and thus this lead to the unreal data presentation which was done by the use of the traditional costing methods which led to the miscalculation of the cost of the manufactured products and the related services. Hence making any decisions based on the provided data will cause the firm to suffer inappropriate situations. The activity-based costing methods help the firms to find the cost of manufacturing and then assign the costs effectively. The cost function of each of the activities is being defined and thus the nature and the extent of that particular job are also assessed. This will thus be helping the high overhead costs to be pursued and then their methods of reduction can be found.
An activity-based costing method is a tool that has proved to be very helpful that is used to identify the costs that are possessed by the organization and then help to reduce them. Cost ascertainment is an important function that needs to be properly tamed otherwise the business will face issues in terms of cost. ABC model simplifies the entire structure and leads to cost ascertainment. It is not like the traditional accounting method which directly assigns the cost of the manufacturing to the firm but it is more diverse and thus identifies all the cost relating to the manufacturing of the product and the activities performed during the manufacturing process so that the company can be provided with the actual costing data and thus make decisions of the firm according to the data presented to it (Petersen & Plenborg, 2012). The managers can avail the benefits and this can lead to a proper understanding of the cost thereby simplifying the activities.
The activities mentioned above can be of any nature which is related to the manufacturing process in any way possible, the overhead expenses have been made on such activities and thus they are also mentioned to be cost drivers these acts as an allocation base. There are different types of manufacturing involved which can be differentiated on the basis of the transaction drivers or the duration drivers (Trade Me group, 2017). Thus instead of making all the costs to be in a group which has one head, the activity-based costing method helps the firm to create new and better allocations of the cost and thus altering the nature of the several indirect costs like the depreciation which can be used to trace the main activities. In short, the process leads to immense benefits in the short term, as well as the long term. It gaps the differences that are witnessed in the cost structure (Petersen & Plenborg, 2012). Hence, such a methodology brings positive impact for the company and helps in new avenues.
Enhancing the top management structure with the help of the activity-based costing model
Methodology under the Activity-based costing consists of the cost allocation, fixed cost, variable cost, cost driver and cost driver rate. All these activity-based costing systems need certain steps for the implementation of the tasks. The identification of the activities and the jobs are the first priority. It is imperative that the selection of the activities needs to be done at the very beginning so that a better opinion can be framed. Then the costs of those activities that are directly related to the activity are determined. This is an essential step because it is important to know the process and the happening. Then the costs are assigned to the cost pools after which the calculation of the activity based measurement of the units. Then the activities are assigned after the determination of the costs. This is followed by the last process of the preparation of the management report and then makes discussions on the study made on the costs.
The direct costs are very easy for relating to the manufactured products. But it is not easy to derive the indirect costs because it is related to several different activities as because of its diverse nature thus grouping all the activities which are further called as the cost drivers. Thus the activity-based costing system has the main function of the reallocation of the direct and the indirect costs which in turn leads to the increment of the accuracy of the cost measurement system to a very large extent.
The cost system is used as the tool for managing and understanding the relationships between the costs and profitability of the customer on the products. Also instead of this process it also helps the firm to manage the processes of identification and the measurement of the processes which are related to the pricing, outsourcing and sales and also to decide whether or not to continue producing a specific product line (Leo, 2011).
The technological advancements have led to the cut of the direct labor costs and increase the equipment costs. The equipment costs are very diverse because they are not functioning for a particular product rather they are working on many products which makes it harder for the firm to assess the cost (Horngren, 2011). Thus these types of costs make the work of the firms to determine the costs a much difficult which can be made easier by the use of the activity-based costing method which accurately determines each and every cost thus helping in the customer classification (Peirson et. al, 2015).
Aligning the activity-based models with the current objectives of the firm
It is also helpful in picking the activities which are not that cost effective and thus stopping the production of the goods that are underpriced and are making the firm to suffer loss. With the increment in the cost accuracy of the management activities, the chances of increased sales are also being observed. This activity can be used to find the inefficient products and the departments and thus stop them so that more attention can be provided to the much profitable talks (Peirson et. al, 2015). Cost control can only be achieved if there are no unnecessary costs present in the department.
The company assigned for the discussion is stated to be termed as Trade me. It is one of the biggest and most renowned auctioning sites present in New Zealand. The site was founded by Sam Morgan in 1999 which he further sold to Fairfax in 2006 for NZ$700 million. The site operates many similar websites like the find someone, travel bug, safe trader and holiday houses. During the time of August 2015, the site was observed to be the fifth most visited site in New Zealand and thus getting ranked 1844 globally on Alexa. It was in 2006 that all the sites relating to the Trade me group collectively had a generation of 60% of the web traffic towards it. With the population of 4.8 million in the country, the site was able to attract 3.7 million people to join them as members. More than 878000 people were found to visit the site as of June 2015 (Trade Me group, 2017). ABC has helped the company to attain significant height by focussing on the reduction in the cost, simplification of the process that reduces cost, to enhance the expenditure on maintenance thereby elevating the overall area of operation, reducing the role of support thereby bringing additional savings. In this scenario, the roles of expatriate are either lessen or reduced (Porter & Norton, 2014). Further, it helps in creating strategies that help the business to flourish.
After the analysis of the nature and size of the firm and all the other characteristics, the firm has taken a huge decision of implementation of the activity-based costing method so that the firm can reduce the costs to a larger extent. After considering all the necessary recommendations it can be clearly observed that the firm has been trying to prioritize the exploration projects in the year 2018 and thus it should have a further improvement in the performance and the processing of all the data so that the information technology used by the firm proves to be the key benefactors which have helped the company in the evolvement of the technologies and thus deliver many stable results (Parrino et. al, 2012). The total functioning of the company strikes the notion that the implementation of ABC will help the company to ascertain and allocate the cost in a viable manner. It helps in knowing the cost structure of the company (Merchant, 2012). though it is involved in information technology yet the benefits of ABC cannot be ignored. Such a practice leads to a proper functioning of the entire business model. The business has been into operations for a very long time and the volume of the business demand that the cost should fall into place. ABC is, therefore, a proper strategy for the company as the costs will be reduced and the business can flourish (Drury, 2011).
Recommendations on the implementation of the ABC models in the company
The company has seen to have many ups and downs when it had bad times, but it survived and even flourished among all the competitors present in the market thus making it compatible to withstand such variations (Goodstein, 2011). The management system of the firm may have also applied many of the strategies in these days so as to check which system works the best for the firm. The success of this company depends on the efficiency of the management that has been provided in doing the work according to the specified plans and objectives (Marsh, 2009). Therefore, the accounting tool rests upon various functions and situations. It is upon the business scenario that a particular tool or mechanism can be put into practice. Hence, the company can use absorption and marginal costing.
Absorption costing – this contains a proportion of fixed cost into every individual product costing and the extension of the stock valuation.
Marginal costing – this is accounting for direct cost at the product level but incorporation of the full fixed overhead cost in an accounting period.
If the level of inventory increases, the absorption costing will enhance higher profits because a level of period fixed cost will be carried forward inn closing stock therefore lessening the cost of sales. On the contrary, if the inventory level declines then the marginal costing will project higher profit as the fixed overhead will be released from the inventory.
It might also happen that all the members and the policies of the firm are working in a satisfactory and described manner but still, the company is experiencing a downward graph to flow (Porter & Norton, 2014). This may be because of the competitive advantage points that may have been ignored by the firm while they were assessing the environment and thus this led to the failure in the assessment of the information and the efficiency gaps present in the system. To ensure a smooth functioning, it is essential for the business to have a deep insight so that it is easy to ascertain and implement a particular method that is ABC or marginal costing or absorption costing (Petty et. al, 2012). These situations have made a great impact on the financial performance of the firm but the problems can only be found by using a balanced scorecard approach.
Conclusion
It has been observed that the company have shown a very good performance in keeping the speed up with the changing environment and thus adapting the activity-based costing and such other tools that have helped the company in many ways to achieve much greater results in the upcoming years which are to come. The company also seems to take into consideration the nonfinancial indicators which may reveal the true reasons behind the financial position and thus make it essential for the Trade me limited to implement all the methods to assess the same. Trade me have been seen to achieve many of the management success after they have used and implemented the Activity-Based Costing method. Thus it can be said that the method will be very profitable for the firm and many alternatives can also be used by it to attain the maximum profit.
References
Drury, C. (2011. Cost and management accounting. Andover, Hampshire, UK: South Western Cengage Learning.
Goodstein, E. (2011). Ethics and Economics, Economics and the Environment. Wiley
Horngren, C. (2011). Cost accounting. Frenchs Forest, N.S.W.: Pearson Australia.
Leo, K. J. (2011). Company Accounting. Boston:McGraw Hill
Marsh, C. (2009) Mastering financial management. Harlow: Financial Times Prentice Hall.
Merchant, K. A. (2012) Making Management Accounting Research More Useful. Pacific Accounting Review. [online]. 24(3), 1-34. Available from https://pdfs.semanticscholar.org/6ccf/f78a452763f17ed5e4f4ddc6b96703801403.pdf
Parrino, R, Kidwell, D. and Bates, T. (2012) Fundamentals of corporate finance. Hoboken, NJ: Wiley
Peirson, G, Brown, R., Easton, S, Howard, P. and Pinder, S. (2015) Business Finance, 12th ed. North Ryde: McGraw-Hill Australia.
Petersen, C. and Plenborg, T. (2012) Financial statement analysis. Harlow, England: Financial Times/Prentice Hall.
Petty, J. W, Titman, S., Keown, A. J., Martin, J. D., Burrow, M. and Nguyen, H. (2012) Financial Management: Principles and Applications, 6th ed. Australia: Pearson Education Australia.
Porter, G. and Norton, C. (2014) Financial Accounting: The Impact on Decision Maker. Texas: Cengage Learning
Trade Me group. (2017) Trade Me group Annual report and accounts 2017 [online]. Available from: https://investors.trademe.co.nz/media/154801/TME-Annual-Report-F17.pdf [Accessed 13 May 2018]
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