Features of ABC Model
Discuss about the Individual differences in managerial accounting.
In this report, analysis of activity-based costing (ABC) system is conducted by highlighting its features initially from the viewpoint of the business organisations. In order to fulfil the goal of the report, an ASX listed entity is chosen and it is related with ABC model so that the higher-level management could use management accounting information effectively. Australia New Zealand Bank (ANZ) has been selected, which is the third biggest bank in terms of market capitalisation after Commonwealth Bank (CBA) and Westpac. The current goals and corporate strategies of ANZ Bank have been assessed for aligning with the ABC system that would help the higher-level management of the bank in making appropriate decisions. Effective recommendations would be provided to the concerned bank about the techniques of implementing the system. Finally, another appropriate management accounting tool has been identified for ANZ Bank besides ABC system in order to aid the management in making suitable decisions.
ABC system could be described as an accounting technique involved in tracking the various activities that an entity conducts for assigning indirect costs to products. From another perspective, this model recognises the relationship among costs, products and activities and thus, lower arbitration is required for allocating costs to products in contrast to the traditional costing model (Bettner et al. 2014). However, difficulties are encountered in the ABC model, since some costs are not easy to be allocated to products. For example, salaries of the management and office staffs ate difficult to be apportioned to a product manufactured. This has resulted in creation of niche of the model in the various global industrial sectors. However, ABC model could be used in product costing, target costing, product line profitability analysis, service pricing and customer profitability analysis (Bokor and Markovits-Somogyi 2015). Thus, ABC model is widely used in all types of entities irrespective of their nature and size for accomplishing their corporate vision and strategies by grasping costs effectively. ABC model is characterised by a number of features, which include the following:
- Since costs under this model are categorised as variable costs and fixed costs, quality information could be obtained that would help in developing accurate cost system in a corporate entity.
- This model helps in comparing the various patterns related to cost behaviour in an effective manner (Butler and Ghosh 2015).
- Close association could be observed between time, events, diversity and volume and the cost behaviour patterns in the ABC model.
- Appropriate cost drivers are identified under the ABC model, so that overheads could be traced to products.
- There are dictations in the cost behaviour patterns, which are possible through the identified cost drivers.
In this section, the ABC model would be aligned with the current goals and corporate strategies of ANZ Bank. Initially, such goals and strategies need to be discussed and then the ABC model would be related for enabling the bank to accomplish the same.
ANZ Bank intends to provide effective solutions to its customers by identifying their immediate needs. According to the management perspective of the bank, there is immense significance of profitability in the Australian banking sector in order to assure long-term growth. It has provided adequate attention for developing working environment in order to strengthen the confidence and morale of the staffs (Anz.com 2018). Hence, the bank has made positive contributions to promote the welfare of the society by improving its quality of services delivered to the customers.
Alignment of ANZ Bank’s Goals and Strategies with ABC Model
The objective of ANZ Bank is to earn greater reputation in Australia by enabling the smooth monetary and capital flows in the market so that the customer needs could be met with utmost precision. It has invested heavily in its training, selection and recruitment programmes for expanding its workforce and accordingly, this has helped in proper execution of the strategies.
In order to market its products and services, ANZ Bank has adopted certain strategies, which are elucidated briefly as follows:
- The bank has focused on advertising its main products that include home loans, business loans and credit cards.
- Adequate reliance is kept on generating brand awareness by obtaining first mover advantage, which would help in maintaining competitive supremacy and growth in the market.
- ANZ Bank has lowered its interest on the loans provided to the customers, while the ATM fees are absorbed completely, since the customers need not have to incur additional fee on each transaction (Campbell et al. 2018).
- In order to provide information regarding its new products and services, ANZ Bank has implemented new technologies for disclosing such information on the bank portal that would help in better management of accounts for the users.
- Credit cards are provided to certain non-working and independent groups of individuals for drawing new customers. The offer is made at a reduced rate of interest on such cards, which has enabled in developing appeal in the customer minds so that it could be procured.
Despite the fact that the international manufacturing industry uses the ABC system more compared to any other industry, this system has gained popularity in the service industry as well. In this regard, Cataldo and Anthony (2018) stated that financial institutions do not have direct costs, since most costs are considered as overheads. Moreover, the banks do not have liquid asset like inventory, since the consumption of services is made when they are manufactured. Hence, the banks might not find the traditional costing system as beneficial; however, with the help of ABC model, various benefits like cost management and greater decision-making could be enjoyed.
There are three sections in ABC model, which ate resource, activity and cost object (Gates and Burke 2015). For ANZ Bank, expenses like functions or cost centres of the various departments are incorporated in the resource section. The corporate office and branches, ATM, direct selling agents, human resource and IT departments along with call centres are used so that the departments could be grouped. The services of human resource and IT departments are explained for calculating the costs (Javid et al. 2016). The transfer of costs is made to the other departments based on the departments’ service volume. Conversely, the branches could be grouped based on their costs for assigning cost. Therefore, the ABC model enables in diversifying the future scope of cost assignment to the branches that would help ANZ Bank in anticipating its advertising costs.
ANZ Bank defines activities according to the transactions that the customers conduct for various products. Such transactions are carried out by using several channels such as origination of commercial loan. For dealing with these activities, the bank needs to collect the application and then the applicant needs to be interviewed. After this, the past credit record of the applicant would be checked to undertake decision regarding the disbursement of loan amount. When the transactions are defined, they would be split up in the form of activities in this system (Klemstine and Maher 2014). Based on the division, the names of the departments and time taken by each activity would be put against the activities. The batch size along with the activities in batch mode needs to be considered and hence, the activities could be grouped, as per the departmental needs. With the help of such considerations, ANZ Bank has eliminated its ATM fees on the customers and the interest rates are reduced as well. Along with this, the cost of implementing new technologies in providing effective customer support has been lowered as well.
Implementation of ABC Model in ANZ Bank
The cost object section is needed to be split into two parts. The first section calculates the different costs of the transactions carried out on the part of the customers for various products through the utilisation of various channels of distribution (Mahal and Hossain 2015). Such instances include the withdrawal of cash through ATM in case of savings account. It needs to be borne in mind that there might not be difference in withdrawal of cash from savings account and current account; however, the costs are to be calculated separately. After identifying the costs with the help of ABC system, the accounts that are used widely in ANZ Bank could be identified and hence, the bank management would assign higher cost on such accounts. As focus is kept on enhancing the quality of the popular products, ANZ Bank has managed to increase its brand awareness so that it could maintain competitive edge in the market. Along with this, such account identification would enable ANZ Bank to track those customers withdrawing cash frequently from ATM and based on such detection, the bank could offer credit cards at a lower interest rate to the customers.
For incorporating the ABC model in ANZ Bank, adequate support from the higher-level management is required. Additionally, the design and incorporation of the model would be the responsibility of the cross-functional team rather than the department of accounting. A special team should be developed that would have representative from each department of ANZ Bank so that the data generated from this model could be used (Oseifuah 2018). The departments from which the representatives would take part are engineering, marketing, accounting and higher-level management staffs possessing technical skills. An external consultant should be appointed having adequate knowledge about the ABC model for providing advice to the team.
There are two reasons for ANZ bank to incorporate the ABC model. Initially, if the higher-level management of the bank does not provide adequate support, the bank managers might not accept the change (Swift 2016). Moreover, such lack of support from the higher-level management might minimise the importance of the ABC model in the eyes of the subordinates and the initiative might be abandoned. For designing and incorporating this model, the management of ANZ Bank is required to have a thorough knowledge of the cost accounting system currently used. Moreover, it is necessary for the created cross-functional team of the bank to participate in the incorporation of the ABC system in order to assign costs suitably to the departments. Hence, the model could be used for generating external financial reports (Weygandt, Kimmel and Kieso 2015).
Another Appropriate Management Accounting Tool for ANZ Bank
Another appropriate management accounting tool that could be used in ANZ Bank is budgetary control. This is because the role of the budgets is crucial in planning and controlling. The managers of ANZ Bank could utilise the budgets in order to plan, control and monitor the various activities at every departmental level. Hence, the budgetary control would fetch a number of benefits for ANZ Bank and they are discussed briefly as follows:
- The personnel efforts could be integrated within the bank for accomplishing a common goal. With the help of budgetary control, each activity could be synchronised and accordingly, efforts could be coordinated in order to meet the planned targets and goals.
- If it is found that the cost incurred for a particular department in ANZ Bank is greater in contrast to the planned budget, appropriate actions could be undertaken for minimising such budgetary variances.
- Knowledge could be obtained from the previous experience with the help of budgetary control (Weygandt, Kimmel and Kieso 2015). If any error or failure is identified in the previous budgets, the managers of ANZ Bank could formulate effective strategies to eliminate such error by identifying the main reasons behind its occurrence.
Conclusion:
The above discussion clearly lays stress on the fact that costs are divided into variable costs and fixed costs under the ABC model so that quality information could be gathered that would help in the design of a suitable cost system in a business organisation. In this case, ANZ Bank intends to sustain its competitive supremacy in the Australian banking sector by reducing its overall expenses and providing effective services to its customers. Thus, the role of ABC model comes into play, since the bank could identify those activities or departments that are not profitable. Accordingly, the bank could apportion increased costs to those activities that are in accordance with the needs of the customers. Finally, the management of ANZ Bank could think of implementing budgetary control, as it would aid in eliminating or at least reducing errors in external management reports.
References:
Anz.com., 2018. About us | ANZ. [online] Available at: https://www.anz.com/about-us/ [Accessed 11 May 2018].
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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.
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Oseifuah, E.K., 2018. Activity based costing (ABC) in the public sector: benefits and challenges. Management, 12, pp.4-2.
Swift, K.D., 2016. ACTG 202.01: Principles of Managerial Accounting.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John Wiley & Sons.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Managerial accounting. Wiley.
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