Activity-Based Costing Method
The report is based on one of the topics of the management accounting. The management accounting topics are activity-based costing (ABC), budgeting, standard costing and many others. The topic that has been selected for this report is Activity-based costing. Activity-based costing is one of the important tools that are used by the real-life organisations. The aim of the report is to explore the findings from the literature research from the selected studies. The studies that have been selected include Article 1- Activity-Based Costing (ABC) – An Effective Tool for Better Management and Article 2- The Excellence of Activity-Based Costing in Cost Calculation: Case Study of A Private Hospital in Turkey.
Further, the details related to the management accounting topic has been discussed. In addition, the explanation of the two studies, the research question and the similarities and differences in the findings of the two studies are discussed in the report. In the end, the specific outcomes or lessons learned from the two studies are discussed. These findings will further provide the benefits to the Australian companies who are making use of the Activity-based costing management accounting tool in their business operations.
Activity-based costing method is a managerial accounting method that is used to trace overhead costs to actions and then assigning the cost to objects (Kaplan and Porter, 2011). In order words, it is the way to assign secondary and overhead cost to products or departments that help the company to products or departments that produce these costs in the procedure of production. Activity Based Costing is developed by Kaplan and Cooper in the Harvard business school for calculating the product cost (Accounting learning, 2018). This product cost is classified as long-term variable and short-term variable costs. These costing method emphases on determining processes of production that is essential in processing a job. In addition, all these individual activities are grouped together along with the same processes into a cost pool which is linked to the particular activity cost driver. Further, this cost pool is analysed and allocated a prearranged overhead rate that will ultimately be allocated to the particular jobs and products (CGMA, 2013). The model includes two major activities which include: –
- Duration Drivers- These drivers help in measuring the time that is consumed by the activities to accomplish.
- Transaction drivers- This talks about the number of times an activity takes place.
In addition, activity based costing is an accounting technique that helps in determining assigned cost to the overhead activities and then assigns a cost to the products. These management accounting tools are used to determine the relationship between the cost, overhead activities and manufacturing the products. The method follows the same relationship which is used by them to assign the indirect cost to the products. Though, this is true that it has been found that there are some costs in a business that is hard to be assigned with the help of the cost accounting (Accounting tools, 2017). The indirect cost includes management and office staff salaries which are hard to allocate to a product due to which this method has found its niche in the sector of manufacturing.
This analysis shows that Activity-based costing is majorly used by the companies in the field of manufacturing the products as it improves the reliability of cost data (Schulze, Seuring, and Ewering, 2012). Thus, this contributes to produce true costs and better classifying cost of the company at the time of the production process. This is found that with the rise in the competition the use of the activity-based costing method is used by the several companies that fall under the different industries. These industries include hospitality, hospitals and healthcare, manufacturing, consumer goods companies, and for many others (Randhawa and Sethi, 2017). All these companies are getting numerous benefits of Activity-based Costing method due to which they have started making use of this costing method in their organisation.
Advantages of Activity-based costing method
The reason behind the rise in the use of the Activity Based costing method is the objective of the ABC method that provides the benefit to the companies. The objective includes rectifying the inaccurate cost information, ABC also work to allocate the overheads on an activity basis, it helps the management at making the decision on time with quality. All these objectives offer the benefits to the company due to which they are able to compete in the market.
In the current era, the company who are making use of this model are getting numerous benefits due to which they are able to manage their cost of operations (Shander, et al 2010). Activity-based costing method is offering numerous benefits and some of them are discussed below:
ABC brings the accuracy and reliability in determining the product cost by directing on the cause and effect relationship in the cost incurrence (Noreen, Brewer and Garrison, 2011). Every company gets the realistic outcome when they implement this costing method for eliminating the indirect cost of their products. Moreover, this system is also used by the companies who offer the diverse products (Drury, 2013). In addition, this method is adopted by the companies because this accurate product cost was not possible in the traditional method of costing.
Activity-based costing method is real in nature in terms of the cost behaviour and this is the reason it helps in eliminating the cost and determining the activities which do not add value to the products (Dale and Plunkett, 2017). This method allows the manager to control numerous fixed overhead costs which are possible by exercising the control of the activities.
Activity-based costing method offers the effective costing information that helps the managers to manage the organisation and their working efficiently which is required to attain the better understanding of the firm’s competitive advantage, strengths and weaknesses (Garrison, et al 2010). This is the effective way through which the company can earn the maximum of the profit or can save the amount. This amount can further be used by the companies for making the right decision for the products and services that they are offering to their customers (Weygandt, Kimmel and Kieso, 2015).
The above given are some of the benefits which the company is offering to the companies who are implementing the Activity-based costing method. These benefits help the company in generating the competitive advantage over their competitors (Pinto, 2010). ABC system is effective that helps the company in managing the cost for the long run by controlling the activities. The companies who are making use of the ABC not only get the cost-benefit but also in managing the activities (Woodruff, 2018).
The two Articles that have been selected for the analysis are selected with the purpose to learn and to get the new research findings that will help the Australian companies in the near future while implementing the activity-based costing system. The reason behind selecting the article 1 is to analyse how real life company – Nestle who is implementing Activity-based costing method in Bangladesh. The article reflects that the data has been captured from both the primary and secondary sources. Primary data has been captured by conducting the interview with the employees of Nestle Bangladesh Ltd. and the secondary data has been collected from different books. The purpose due to which the author conducted the research is to include the theories related to the Activity-based costing and its application within the real-life organisation. The author has conducted the research on the different cases of different cases but the major data has been taken from the Nestle Bangladesh. The research question that has been included in the article is; to identify the appropriate action based costing system that is used by the manufacturing sector.
Explanation of the purpose of the two studies
On the other hand, the second article that is selected as the study talks about the application of ABC Systems to Health Care which is effective in the market of Turkey. The ABC system has been applied in the private hospital that is located in Istanbul, Turkey and it is one of the largest private hospitals that are available in Turkey. The reason for selecting this article as a study that this will provide the research findings related to the activity-based costing company in the healthcare. This shows that apart from the manufacturing industry the Activity-based costing is used in the other industries also which include health care. In this study, the author has selected the Gynaecology department as the treatment unit for the particular hospital. The effectiveness for implementing the Activity-based costing for the department is discussed in the report. The major research question that has been answered in the research article is: The effective implementation of ABC on health care sector.
This section of the report includes the similarities and differences in the findings of the articles. This is clear that both the selected articles are totally different from each other due to which findings of the articles will show the more of different. Though, the method of Activity-based costing remains the same with the same theories.
- In the article 1, this is clear that ABC implementation helped the managers of Nestle Bangladesh in making their decision more quick and accurate by comparing the actual performance with the budgeted estimation for improving their business operations (Mahal and Hossain, 2015). On other hand, Article 2 shows that the ABC system has helped the administration of the healthcare service providers to plan for the better services within the organisation after knowing the accurate performance. This will ultimately help the administration of to bring the improvement in their business operations.
- Article 1 findings reflect that the Nestle is able to enhance the operational performance which is possible by allocating the overhead cost effectively. This shows that the activities of the company get managed effectively with the low cost. Similarly, in the article 2, the use of the ABC system offer the rise in the healthcare facilities cost effectively without compromising the quality of service that they are offering to their customers. The management of the healthcare in Turkey can easily control the cost effectively with the use of ABC method (Aldogan, Austill and Kocaku?la?h, 2014).
- The article 1 reflects the analysis of Nestle Bangladesh, a company that desiin aa n wide range of products with geographical presence. This is the reason due to which the company needs to apply that activity-based costing system with the help of which they can easily manage the activities or processes that are present (Mahal and Hossain, 2015). In addition, this method is appropriate when the company deals in diverse service. On the other hand, Healthcare service which has the service diversity to manage but over here the focus has been done on the particular department of the private hospitals that merely include 2 services in the Gynaecology Department.
- The major difference lies in the findingofoe both the articles is related to the training to the employees. In article 1, Nestle Bangladesh employees accepted the system of ABC for their organisation and taken the training for the same. Though, on the other hand, in the healthcare most of the employees are not able to understand the benefits of the ABC system yet due to which they are not able to accept the system effectively (Aldogan, Austill and Kocaku?la?h, 2014).
- This found that implementation of ABC syshave has been done in the private organisation for only single department where they are facing the issues. This shthehthe n aat application of the ABC system is limited in health care sector. Though, on the other hand, the use of the ABC system in manufacturing industry is done in each and every department and on the overall operations of the business that they are conducting in the competitive environment.
This section includes the outcomes from the two studies that will be considered as the useful source for the management accountants in the companies of Australia.
The implementation of the ABC system supports the management of Nestle Bangladesh in making the decisions by comparing the original performance with the budget estimation. Moreover, the top management of Nestle Company make use of the ABC software that simplified the system of costing. This software is imported by the company from India and Switzerland which shows that they have the knowledge of the effective use of the ABC system to their company (Mahal and Hossain, 2015). Through this, the company will be able to evaluate the consumer profitability which is one of the good indicators of the performance of the firm. This shows that decision making is linked with the knowledge of the top management of Nestle Bangladesh for the products and services.
ABC method of management accounting brought the improvement in the performance of the employees. The outcome reflects the effective ABC implementation eliminates the cost within the activities and manages them. This makes the activity cost-effective due to which the performance of the company improves. This is also found that Chief accountant of Nestle Bangladesh Ltd. was trained from China for 3 years. Moreover, the management also invited the experts within the company to visit and train the employees. The employees of Nestle Bangladesh have taken the ABC system positively. This is clear as the company deals in the wide range of the products due to which they need to implement ABC effectively for which they need to hire an expert.rformed by the organisation. This cost difference can easily be understood with the help of the analysis of both traditional and Activity-based costing. The below-given table reflects the same for the private hospital in Turkey: –
The table reflects the indirect costs which are significantly different in both the method because of the clear logic behind the cost allocation process. This has been found that the indirect cost of the natural childbirth has increased in the method of ABC than the traditional costing which means the profit of the company will decrease. In addition, it decreased for the caesarean operations in ABC which a means a rise in profit of company. This shows that implementation of the ABC method in health care is generally done in the organisation where the issue has been identified.
There, healthcareh care companies in Australia need to identify the department in which they are dealing the issues and then they should apply the ABC costing method. This will help in eliminating the cost from the activity and enhancing the profit to the company.
This is found that ABC implementation suhealthcareh care organisation in analysing the actual performance which is must for the administrator because this actual performance will help the health care further in making the accurate decisions. The decision related to the service-in-house, providing new services and reorganising of service get improved. All these decisions are essential for the hospital to enhance their profitability and also their performance in the competitive environment (Aldogan, Austill and Kocaku?la?h, 2014). The management found that this tool is valuable not only for managing the cost but also for improving the performance.
Therefore, the Australian Hospital management can effectively make use of the ABC system while making the decisions for the company related to their service or cost.
Conclusion
In the end, it can be said that company has to bring improvement in their products and benchmark its activities with the most efficient in the world for which they are making use of Activity- based costing method. The explana of activity-basedy- based costing as one of the important management accounting tool has been discussed. The report includes the details related to the two studies and these studies are Article 1- Activity-Based Costing (ABC) – An Effective Tool for Better Management and Article 2- The Excellence of Activity-Based Costing in Cost Calculation: Case Study of A Private Hospital in Turkey. The report includes the similarities and differences related to the findings that are clear in the two studies. Moreover, the outcomes of the articles are discussed which will be helpful for the Australian company.
References
Accounting learning (2018) Activity Based Costing | Meaning | Features | Objectives | Implementation [Online]. Available from: https://accountlearning.com/activity-based-costing-meaning-features-objectives-implementation/ [Accessed on 26th September 2018]
Accounting tools (2017) Activity-Based Costing [Online]. Available from: https://www.accountingtools.com/articles/2017/5/14/activity-based-costing [Accessed on 26th September 2018]
Agarwal, R. (2018) Advantages and Demerits of Activity Based Costing (ABC) [Online]. Available from: https://www.yourarticlelibrary.com/accounting/costing/advantages-and-demerits-of-activity-based-costing-abc/52617 [Accessed on 26th September 2018]
Aldogan, M., Austill, A.D. and Kocaku?la?h, M.C. (2014) The excellence of activity-based costing in cost cala a culation: case study of a private hospital in Turkey. Journal of Health Care Finance, 41(1).
CGMA (2013) Activity-based costing (ABC) [Online]. Available from: https://www.cgma.org/resources/tools/essential-tools/activity-based-costing.html [Accessed on 26th September 2018]
Dale, B.G. and Plunkett, J.J. (2017) Quality costing. New York: Routledge.
Drury, C.M. (2013) Management, and cost accounting. New York: Springer.
Garrison, R.H., Noreen, E.W., Brewer, P.C. and McGowan, A. (2010) Managerial accounting. Issues in Accounting Education, 25(4), pp.792-793.
Kaplan, R.S. and Porter, M.E. (2011) How to solve the cost crisis in health care. Harv Bus Rev, 89(9), pp.46-52.
Mahal, I. and Hossain, A., 2015. Activity-Based Costing (ABC)–An Effective Tool for Better Management. Research Journal of Finance and Accounting, 6(4), pp.66-74.
Noreen, E.W., Brewer, P.C. and Garrison, R.H. (2011) Managerial accounting for managers. Germany: McGraw-Hill Irwin.
Pinto, J. (2010) Achieving Competitive Advantage. Prentice-Hall, Upper Saddle River, NJ.
Randhawa, J.S. and Sethi, A.S. (2017) An Empirical Study to Examine the Role of Manufacturing Informatics in Smart Manufacturing. International Journal on Recent and Innovation Trends in Computing and Communication, 5(5), pp.262-269.
Schulze, M., Seuring, S. and Ewering, C. (2012) Applying activity-based costing in a supply chain environment. International Journal of Production Economics, 135(2), pp.716-725.
Shander, A., Hofmann, A., Ozawa, S., Theusinger, O.M., Gombotz, H. and Spahn, D.R. (2010) Activity?based costs of blood transfusions in surgical patients at four hospitals. Transfusion, 50(4), pp.753-765.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E. (2015) Financial & managerial accounting. New Jersey: John Wiley & Sons.
Woodruff, J. (2018) The Disadvantages & Advantages of Activity-Based Costing [Online]. Available from: https://smallbusiness.chron.com/disadvantages-aactivity-basedivitybased-costing-45096.html [Accessed on 26th September 2018]
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
