ABC Model
Discuss about the Abc Model And Its Benefits To Top Management Team.
The report has been prepared using the title ABC Model and its benefits to Top Level Management. The report has been frame with an intention of analyzing what ABC Model of management accounting and how ABC model helps in providing management accounting information to Top Level management in effective manner so that information can be used to prepared company’s mission and vision and overall goal can be achieved. The report has been framed in major four parts. First part describes ABC model and its different characteristics which provide useful information to management. The second part of the report describes how chosen company’s mission and objectives are aligning with ABC Model along with impact of ABC model on company’s strategies. The other part explains different methods apart from ABC model which has been used to generate management accounting information. The last part provides recommendations to chosen company so that ABC model implementation can be more effective. The report has been ended with proper conclusion. For the purpose of the report Cleanaway Waste Limited, a company registered in Australia and listed in ASX has been selected. The company is involved in the business of waste management, recycling and industrial services to different companies in Australia The report has been framed using the information available on company’s website and other information available on reliable sources.
Management of every company requires the accounting tool which can help them with the required information so as to take a well informed decision. The gap between the exact information and the decision has been bridged by this model known as ABC model. ABC model of management accounting is termed as the Activity Based Costing Accounting Model. It has now become the major tool for the management of the company to ascertain the cost of the product and accordingly the selling price for the product so manufactured (Rasiah, 2011). The model is being used by almost all of the companies across the globe.
ABC has been defined in the generic terms as the method of accounting through which the overhead costs are assigned on the basis of the activities which creates value to the product (Ismail, 2012). CIMA has defined the activity based costing the method of accounting which help in attribution of the costs to the units of the costs on the premise of the benefits that will be received from the activities which are indirect (CIMA, 2012). Thus, the activity based costing helps in allocating the overhead costs on the basis of the consumption of the activities rather than on the basis of the rate which is predetermined on some basis like machine hours or labor hours, etc
Meaning
The ABC model has been characterized by the following:
- Proper Division – The first and the foremost feature of the ABC model is that it maintains the clear and proper bifurcation of the total costs as fixed costs and variable costs. By providing such a division of the total costs of the product, the management will have the qualitative information and which in turn help the company in defining and designing the suitable system of cost in the company. The management can have the clear idea as to which cost is higher and which is up to the mark and can take necessary action (Anderson,2012 ).
- Cost Behavior – The second feature of the ABC model is that it carries the process whereby the proper distinction has been made regarding the behavior of the patterns of the cost. It is done when the identification of activities are identified which is done depending upon the nature of business and the size of the company. It helps the company to analyze the behavioral patterns of the cost and that too related with the activities on which such cost is being incurred. Through this the management can take the effective and efficient decision as to how the behavior of the cost changes.
- Cost Driver – In the process of the activity based costing, the cost driver plays a very important role in the ascertainment of the cost. These are identified and shall be identified in the proper manner as it is the one on the basis of which the cost of the activity is identified. Therefore, identifying an appropriate cost driver is one of the features of the activity based costing method.
- Details of Activities – It contains the detail as to how each of the activity is carried out during the process of the production. This will help the management to be informed about the costs which is being incurred at each value addition activity (Swenson, 2015).
Thus, the above are the main features of the activity based costing management tool which induces the management of the company to adopt the same for the ascertainment of the cost of the product.
For the purpose of this study, the company – Cleanaway Waste Limited has been selected which is registered in the Australia and is listed in the stock exchange of Australia and is into existence from the year of 1870.
The company has mentioned the mission in the statement of the corporate governance for the financial year ending two thousand and seventeen. The company has one major mission – Making a sustainable future possible. It means that the company has been working with the dedicated team only with the mission that the company shall work in such a manner so as to make the company running and have sustainability in the future years to come. Second mission is to Care for country. This mission implies that the company work only to save the environment and society of the country from the hazardous and toxic waste (Cleanaway Waste Limited, 2017).
As the company is engaged in the business of making the goods from the waste by recycling from those resources, the company has the robust and creative technology which promotes the sector of the waste management. Apart from the aforesaid missions, the company has defined objectives. The main objective of the company is to provide the best services to the customers and the second main objective is to have the maximum use out of the available resources.
In this manner, the company is performing its functions and making the best use of the available resources to have the maximum output with the lowest cost.
Strategies are the intention that the company has while performing the function. Strategies may be based on the operations or based on the management. The first strategy of the company is to have the innovative technologies through which the waste can be recycled into different products. The second strategy is to cater to the needs of the customers as and when required. The needs shall be satisfied in the meaning of the management of the waste. The third strategy is to perform the functions in accordance with the needs and the requirements of the different stakeholders of the company (Cleanaway Waste Limited, 2017). These strategies will help the management of the company to operate the company in an efficient manner and also allow the company to run for the future years to come.
Features
The strategy of the company is required to be updated in accordance with the requirements of the environment and in case any change is required then accordingly it shall be modified.
The ABC model helps in achieving the strategies of the company. It has helped in the following manner:
- It helps in identification of the activities which creates the value to the product. In the process of waste management and the recycling of resources, many activities happen that adds value to the product at each instance. With the identification of the activities the management of the company can check as to whether the particular activity which is being carried out is adding value to the goods so produced after recycling. If yes then the same shall be monitored in respect of the time and the consumption of resources and in case of no the same shall be removed from the chain of activities that is being followed in the process of recycling of resources (Haddai and Seyednezhad,2015). It helps in achieving the cost reduction and hence higher returns for the stakeholders of the company and hence the strategy of considering the needs of the stakeholders will be fulfilled (Lucey, 2012).
- It helps in detailing as to which element drives the cost of the activity. It means it provides the company to know the cost drivers for each of the activity. With the help of the cost drivers identified in the proper manner the management of the company can take the steps to reduce the cost accordingly. The company in the process of the recycling of resources might have the activity of cutting of the waste for which the driver will be either number of machine runs or the setting up of machine. If the cost comes high in comparison to the normal one then the same shall be controlled by the company in the very early manner (Stout, 2011).
In this manner, the ABC model will help in assisting in achieving the strategy of the company and also helps in achieving the objectives of the company.
Based on the above research and findings, following has been recommended for the selected company:
The first recommendation is to adopt the ABC model for the activities and costs pertaining to the recycling of resources that forms the part of the waste management of the company.
The second recommendation is to adopt the ABC model for each activity of the company made under the production of the goods so as to have the uniform costing of the product throughout the organization. This will help in integrating the efforts of the organization towards the attainment of the common goals and hence it is recommended.
Apart from the ABC model, one more model which can be used is the activity based management. This tool help the company in managing the activities and which in turn will help the company in estimating the cost and thus making the company to adopt the cost reduction methods. Other management tools are program evaluation review technique and critical path method (Dekker and Van Goor, 2010)
Conclusion
Management accounting information is necessary for internal users of the accounting for taking decisions about the working of an entity. This information can be generated with the use of different tools and models defined in management accounting. ABC model of providing management information is one of the useful and most effective tools for providing information to management of the company. Cleanaway Company and its management is effectively using ABC model in framing the strategy relating to the production and the management. In the given report, the major factors have been defined as to how the ABC model will help the company in achieving its objectives and the missions and also the strategies. Apart from the ABC model, other management tool has also been discussed. To conclude the report, the ABC model is the best model for the management of the company to rely upon.
It is recommended for the company to adopt the ABC model in the company.
References
Anderson, S.W., (2012), “Factors influencing the performance of activity based costing teams: a field study of ABC model development time in the automobile industry”. Accounting, Organizations and Society, 27(3), pp.195-211
Cleanaway Waste Limited, (2017), “Annual Report 2017”, available on https://www.cleanaway.com.au/ accessed on 16-05-2018.
CIMA, (2012) “Activity Based Costing”, available on https://www.cimaglobal.com/Documents/ImportedDocuments/cid_tg_activity_based_costing_nov08.pdf.pdf and accessed on 16-05-2018.
Dekker, H.C. and Van Goor, A.R., 2010. Supply chain management and management accounting: a case study of activity-based costing. International Journal of Logistics, 3(1), pp.41-52
Haddai M and Seyednezhad, (2015), “Comparative Study of Traditional and Activity-Based Costing in Forging Companies of Iran Tractor.” available from https://www.ijmsbr.com/Volume%204%20Issue%203%20Paper%201.pdf and accessed on 16-05-2018
Ismail, N.A., (2012), “Activity-based management system implementation in higher education institution: Benefits and challenges” Campus-Wide Information Systems, 27(1), pp.40-52
Lucey, T(2012), “Costing”, South Western Cengage, Chapter 19.
Rasiah D, (2011), “Why Activity Based Costing is still tagging behind the traditional costing in Malaysia?” Journal of Applied Finance and Banking, Melaka: International scientific press.
Stout, D.E. (2011), “Implementing time-driven activity-based costing at a medium-sized electronics company”, Management accounting quarterly, 12(3), p.1
Swenson, D., 2015. The benefits of activity-based cost management to the manufacturing industry. Journal of Management Accounting Research, 7, p.167.
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