Features of ABC Model
Discuss about the Efficient Strategic Management Process.
This report takes an honest attempt to discuss about different aspects of the Activity Based Costing (ABC) model. The main aim of this report lies in the discussion of ABC model is respect to one of the Australian Securities Exchange (ASX) listed business entity. For this report, Orica Limited is taken into consideration. Established in the year of 1874, Orica Limited has its business operations in the Australian mining, oil and gas industry. The company is regarded as the largest provider of innovative blasting system and commercial implosives to the mining, oil and gas industries (orica.com 2018). The report sheds light on some of the major aspects of ABC model like its features, explanation, and implementation process along with some recommendations for its effective implementation.
All over the world, ABC model is regarded as a major costing tool that assists the business organizations in the identification of the performed activities that is one major part of the business operations; the next process involves in the allocation of the indirect costs to the products or services. Under ABC model, major emphasis is provided on the relation between the products, costs and activities for the assignment of the indirect costs to the manufactured products more efficiently than the traditional costing method (Adioti and Valverde 2013). There are instances where it become complex for the organizational manages to assign some specific indirect costs to the products in the ABC model. For example, salary for the employees is one aspect and the managers face some major difficulties in allocating this cost to the products or services. However, the organizational managers are able to obtain the required cost information with the help of ABC model and it is one of the major reasons of its popularity among the companies (Haroun 2015). The use of ABC model can be seen in some of the major areas; like target costing, probability analysis of product line, product costing, profitability analysis of the customers and others. Most importantly, the application of this model can be done across all the business industries.
There are some specific features of ABC model and the following discussion sheds lights on them:
- The application of ABC model helps in the segregation of the total costs of the companies in fixed costs and variable costs. This segregation of costs helps the business organizations in the adoption of appropriate costing strategy based on their types of industry and costing operations (Abbas and Wagdi 2014).
- One important feature of ABC model is that it helps the business organizations to distinguish the cost behavior pattern in the whole costing operation.
- ABC model helps the business organizations in directly linking the pattern of cost behavior with various other aspects like volume, diversity, time and various cost events.
- One of the major features of the ABC model is that it assists in the identification of the cost drivers in order to trace the cost overheads of the products (Maruszewska 2015).
- The presence of ABC model makes the organizational managers able in dictating the cost behavior patterns with the help of the cost derivers.
The above discussion indicates towards the fact that the presence of ABC model helps the business entities in the achievement of the objectives and goals. The following discussion shows the mission, objectives and strategies of Orica Limited.
Mission, Objectives, and Strategies of Orica Limited
It needs to be mentioned that Orica Limited has a clear purpose of their business. The mission of the business of Orica Limited is to make their customers successful all over the world. Safety, responsibility and sustainability are three of the major dimensions of the business operations of Orica Limited as the company ensures to operate safely, responsibly and sustainably. For this reason, the mission of the company is work together to enable the growth and creation of value for their shareholders (orica.com 2018).
Apart from this, Orica Limited has some specific objectives. The first objective of the company is to provide great priority to the safe of their employees as the company is always ready to take the responsibility of the safety of their employees as well as others. The second objective of the company is to achieve the organizational goals and objectives by working together. However, some other objectives of Orica Limited are to maintain the integrity, provide respect to all and others (orica.com 2018).
Specific set of core business strategies are the major drivers of the business operations of Orica Limited. As per the major strategies, the major aim of the company is to become the trusted partner of choice of the customers with the help of creating, developing and delivering the services related to civil mining and blasting as this is crucial for the company to make themselves more productive and the management of critical risks (orica.com 2018). For this reason, another major strategy of the company is to work together towards the achievement of the objectives. With the assistance of these strategies, Orica Limited has become able to maintain the strategies position in the mining industry (orica.com 2018).
The most popularity of ABC model all over the world can be seen in some of the specific industries like the manufacturing industry, mining industry and others. In this context, it needs to be mentioned that the main business operations of Orica Limited lies in the manufacture of blasting explosives as well as the mining process. For this reason, the management of the company can become majorly beneficial in achieving the business objectives and goals with the implementation of ABC model in the company (Onat, Anitsal and Anitsal 2014).
The implementation of ABC model in Orica Limited will classify the manufacturing and mining activities in four broad categories; they are input activities, processing activities, output activities and administrative activities that provides support to the first two activities. The adoption of ABC model will help the company in combining these activities into one function. After that, the presence of ABC model will help the management of Orica Limited in breaking down the tasks into activities so that the costs associated to these activities can be managed effectively (Kali?anin and Kneževi? 2013).
Implementation Process of ABC Model in Orica Limited
The implementation of ABC model in Orica Limited will recognize five level of activities; they are unit-level activities, batch-level activities, product-level activities, facility-level activities and customer-level activities. The occurrence of unit-level activities can be seen in the production of each unit in the company. Batch level activities will be there when the company will carry on the production process in groups of units. Product level supports the production process of the company for the specific products. Facility level activities will be there for the benefit of the total production process (Chiarini 2014). The implementation of ABC model in Orica Limited will help in the classification of the repetitive and non-repetitive production activities.
Another major work of ABC model in Orica Limited is to make linkage between costing activities and the cost drivers. Cost drivers help in establishing cause-and-effect relationship with the cost objectives. There will be two kinds of cost derivers in the company; they are resource drivers and activity drivers. With the assistance of the resource drivers, the management of Orica Limited will be able to measure the quantity of the resources consumer by an activity. On the other hand, with the help of the activity drivers, the company will be able to measure the frequency as well as intensity of demand placed on the ABC model (Hoozée 2013).
However, at the time of the implementation of ABC model, the cost accountants of Orica Limited will have to face certain difficulties to select the cost drivers as they are required to trade off accuracy against the complexity of ABC model. For this reason, the management of Orica Limited will have to group all the similar cost drivers in one cost pool. After this process, it will be required for the management of Orica Limited to apply the cost pools in the product line with the help of rates of cost drivers on the basis of the number of the cost driver transactions (Shigaev 2015).
With the application of the above-discussed procedures under ABC model, the managers of Orica Limited will be able in gaining all the required costing information about the whole manufacturing system. In the presence of all the required costing information, it will be possible for the managers of Orica Limited to optimize the costs of their products so that the goals and objectives of the company can be achieved.
The following are the two recommendations for the effective implementation of ABC model in Orica Limited:
- In order to ensure the effective implementation of ABC model, it is recommended for the senior management of Orica Limited to extend their support to the company. The management of the company is required to consider the fact that it is the responsibility of the cost-functional team to handle all the aspects related to the implementation of ABC model. For this reason, it is required for the senior management of Orica Limited to provide the cost-functional team with all the required resources so that they can effectively carry on the ABC model implementation process (Mortaji, Bagherpour and Mazdeh 2013).
- There are two major factors for those the senior management of Orica Limited is recommended to provide their support to the implementation of ABC model. In the absence of major support from the management of the company, the implementation of ABC model will face major resist from the employees and staffs of the company. At the same time, the employee and other staffs of Orica Limited would consider the ABC model of less importance in the absence of the support from the senior management (Shigaev 2015).
Recommendations for the Effective Implementation of ABC Model
As an alternative management accounting tool of ABC model, the management of Orica Limited has the option to adopt Budgetary Control as the business organizations can use this tool of management accounting for planning and controlling various activities of their business. The implementation of budgetary control will make the management of Orica Limited to plan, monitor and plan the manufacturing as well as business activities of the company (Adler 2013). The major advantages of budgetary control are discussed below:
- The management of the business organizations become able in increasing the effort from their employees as well as other staffs for the achievement of the business goals and objectives (Drury 2013).
- In case the actual expenses of the businesses exceed the budgeted expenses, the management of the business organizations gets the scope to take remedial actions in ordr to correct the situation.
- The implementation of budgetary control in the operations of the companies makes the management able in gaining the required information about the past events as the management can develop effective strategies in the presence of this information in order to ensure the non-repeat of those mistakes (Drury 2013).
Conclusion
The above discussion indicates towards the fact that the business organizations all over the work are adopting the strategies of ABC method for improvement of the costing system. As per the above discussion, adoption of ABC method helps the business organizations in segregating the total cost in fixed costs and variable costs. Moreover, the management of Orica Limited will be able in gaining all the required information related to costing from ABC method that will be major help for them in the development of effective costing strategies. In order to ensure the effective adoption and implementation of ABC method, the support of the senior management of the companies is required. From the above discussion, it can be seen that the business organizations can adopt the strategy of budgetary control as an alternative method of management accounting as it helps the business entities in planning and controlling the business activities.
References
Abbas, K. and Wagdi, O., 2014. Cost systems adoption in Egyptian manufacturing firms: Competitive study between ABC and RCA Systems.
Adioti, A.A. and Valverde, R., 2013. Time-driven activity based costing for the improvement of it service operations. International Journal of Business and Management, 9(1), p.109.
Adler, R., 2013. Management Accounting. Routledge.
Chiarini, A., 2014. A comparison between time-driven activity-based costing and value stream accounting in a lean Six Sigma manufacturing case study. International Journal of Productivity and Quality Management, 14(2), pp.131-148.
DRURY, C.M., 2013. Management and cost accounting. Springer.
Haroun, A.E., 2015. Maintenance cost estimation: application of activity-based costing as a fair estimate method. Journal of Quality in Maintenance Engineering, 21(3), pp.258-270.
Hoozée, S., 2013. Designing time-driven activity-based costing systems. The routledge companion to cost management, p.126.
Kali?anin, ?. and Kneževi?, V., 2013. Activity-based costing as an information basis for an efficient strategic management process. Economic Annals, 58(197), pp.95-119.
Maruszewska, E.W., 2015. Applicability of activity based costing in new product development processes. Management Systems in Production Engineering, (1 (17)), pp.35-39.
Mortaji, S.T.H., Bagherpour, M. and Mazdeh, M.M., 2013. Fuzzy time-driven activity-based costing. Engineering Management Journal, 25(3), pp.63-73.
Onat, O.K., Anitsal, I. and Anitsal, M.M., 2014. Activity based costing in services industry: A conceptual framework for entrepreneurs. The Entrepreneurial Executive, 19, p.149.
Orica.com. (2018). Orica – About Us . [online] Available at: https://www.orica.com/About-Us#.WwTYV-6FPIV [Accessed 23 May 2018].
Orica.com. (2018). Our Charter . [online] Available at: https://www.orica.com/About-Us/our-charter#.WwTbJu6FPIV [Accessed 23 May 2018].
Shigaev, A., 2015. Accounting entries for activity-based costing system: The case of a distribution company. Procedia Economics and Finance, 24, pp.625-633.
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