The explanation of ABC model and its features
Discuss about the Activity Based Costing for AGL Energy Limited Company.
Every company is willing to have a management system which can improve its performance. For this reason, they always train their managerial personnel to achieve this. Some have also decided to employ the skilled staffs. But for some companies, they have decided to in cooperate the management tools in their system. An excellent example of the tool that is used by many companies includes the Activity Based Costing. The ABC system is an example of a management tool which assigns a cost to activities and the activities of the products. The system is considered to be useful in the companies than the traditional method of the management system (Christopher, 2016). The implementation of the ABC system improves the efficiency and the quality of the service. Apart from the ABC management tool, there are other examples of the systems. These include Time Drive Activity-based Costing, the Balanced Score Card method among others. They have been considered very useful because of the reduction in the running capital. The systems are also very useful and instrumental regarding the management decision making . The Activity Based Costing system provides a clear cost data which can be used in the allocation of the prices of the products. The AGL energy Limited is a good example of the company which is willing to implement the ABC management system. The use of the ABC system will enable the company to improve its performance (Christopher, 2016). The report, therefore, covers some issues. Firstly, the report contains the general ABC model and its features. Secondly, the application of the Activity Based Costing system is also discussed in the report.
The Activity Based Costing system is an example of the management tool where the cost is assigned to the activity and the activity of the products. It is the improvement of the Traditional management system. The Activity Based Costing system was started by the two scholars namely: Kaplan and Coopers (1978). The system can recognize the relationship that exists between the activity and the products concerning the costs. This makes it unique than the traditional methods of management systems. In the old management system, the managers were not able to identify the rating of the product concerning time and cost. The timing of the manufacturing process was done manually by the managerial staffs. This could slow down the performance of the whole process (Zang, 2011). Out of the challenges incurred, the management of the companies such as the AGL energy limited opted for the implementation of the Activity Based in their system.
Features of the Activity Based Costing
The Activity Based Costing system is preferred to the Time Drive Activity Based Costing because it is easy to implement. Apart from this, the system is also cheap regarding training than the other management systems. The ABC system is used by the company to show the actual cost of the product and even its time allocation. The system is considered reliable than the traditional management systems. The reliability of the cost data is very helpful in producing the actual price of the product (Dale & Plunkett, 2017). The use of the Activity Based Costing in a company helps it to identify and classify the products regarding prices in the production process. Through these advantages, the AGL energy limited will be able to boost its management regarding the energy production. It will also assist in comparison and setting of the prices about the international market. By constant application, the ABC system can be improved to form the Time Drive Activity Based Costing system.
Because of numerous features that are posed by the Activity Based Costing, its application is much recommended by various companies. The AGL energy company is one of the leading companies which is willing to have a full implementation of this new system. The ABC system is classified into two types of costs (Tsai & Hung, 2009). These include the fixed costs and the variable costs. All these classifications are very useful since they are used to bring the distinction between the products and their respective price in the company. For example, The Company uses the technique in identifying the energy generated per given hour and the amount of it that is used for a given time (Zott & Amit, 2010).
Secondly, the ABC system has a behavior pattern related to the cost and the volume of the products manufactured. Some of this behavior pattern including the volume of the products produced, the products diversity, the time allocation of each activity and the respective product. In this feature, the cost drivers are the one that dictates the changes in the pattern. All these dictates the overhead performance of the products regarding the cost and the time allocation of each product. These features are very important and can improve all the departments of the company (Drury, 2013). The managers and the Chief Executive Officers should try to ensure that system is implemented within the shortest time possible. In the beginning, the company may be able to spend a lot because of the initial requirements. But upon the implementation, the AGL energy company will be able to spend less in all its management levels.
The client company for Activity Based Costing (ABC) implementation
The company should also get prepared for the changes that may take place upon the implementation of the system. The companies which implement this new system is in a better position of improving its quality and service. The system is again categorized into two important categories. Some of these include; the short-term variables and the long-term variables. The short-term variables mostly deal with the allocation of the products regarding the time and the product allocation (Tse & Gong, 2009). The labor cost and the time for the full implementation are among the attributes of the short term variables. An Activity Based Costing system sometimes do not cater to some variables within the company. Some of these variables are considered to be too complicated. The variables include: the constant change in salaries and the hours assigned to the employees. For the long-term variables, the application in the product cost and time allocation for the activity is not possible because of its complexity during the implementation.
The client company for Activity Based Costing (ABC) implementation
The mission of the company is to offer efficient energy and quality service to the customers. The strategies of the company are to reach some customers regarding service delivery and power connection to the potential customers. Out of these objectives and strategies, the top management will be able to run the company with no challenges.
As the consultant in the management field. I have been contracted to advise the AGL energy Limited on ways of the implementation of the Activity Based Costing system. The name of the company is the AGL Energy Limited (Heath et.al 2012). It is one of the companies categorized under the ASX companies in Australia. The company is well known for the generation and offering of consultancies in the energy sector. The company operates in Australia. It deals with the energy-related products such as electricity, gas, and oil. Apart from the power generation, the company also operates the retail in electricity. It provides energy and electricity to the entire customers within Australia. The AGL energy company generates power from the following sources: hydroelectric systems, geothermal, Coal and from the green energies. To improve its management and quality in service, the company has decided to implement the use of the Activity Based Costing system in its management system (Goetsch & Davis,2014). This will help it to realize the maximum power production and to know the demand of the power against the generated energy. The company operates under a wider area and generates over 10000 megawatts. Due to its size, the AGL energy company has decided to implement the use of the ABC management system to help Essen, the management of the company.
The mission of the AGL Energy Limited Company
By use of the ABC system, the top managers will be able to help them in decision making.This will make them understand the amount of energy generated and the demand of the same company. The ABC system will also help the company to assign different production generators, and the time they take to complete the generation (Hoozée & Bruggeman, 2010). The volume and speed of the water that turns the turbines can also be calculated by the use of the ABC management system. In addition to these, the management of the entire company can be centralized under standard program of the company. The Activity Based Costing system has a model which can assist the managers in the pool supervision of all the projects. The availability of the cost data will support the company to understand the number of the machines to implement. The managers will also be able to understand the efficiency of the tools and their expected lifetime (Dale & Plunkett, 2017).
As one of the chosen consultant, I, therefore, recommend for the implementation of the Activity Based Costing in the entire management process of the AGL energy Limited company. The application should run together with the company’s objectives and the strategic plans of the company. One of the most significant mission of the AGL Company is to generate efficient, reliable energy at all the time. The company is also willing to offer quality service to their customer ’s. By applying this new system, the company will be able to achieve all these expectations of the company (Krutz & Vines, 2010). The company will be able to make proper decisions in case there are a power blackout and any related breakdown that may take place on their machines.
For the company to ensure the effective implementation of the ABC system as a management tool, these are the recommendations identified as necessary for the report. Firstly, the company should be able to persuade the top management staff by advising them on the benefits and the advantages of the Activity Based Costing system. By being aware of the benefits and importance of the Activity Based Costing, the company shall be pure in the implementation (Horngren, 2009).The company should also ensure that the top management is well trained on the new program and changes which may occur. The training must be accompanied by the unexpected changes regarding technology.
There is some management system implemented in the management system. Apart from the Activity Based Costing, there are other types of the management tools. Some of the examples of the method include the Time Drive Activity Based Costing (TDABC) and the Balanced Score Card. The TDABC is an improvement of the Activity Based Costing. Apart from the cost and time, the system is a time driven due to its unique feature (Gervais, Levant & Ducrocq, 2010). A Time Driven Activity Based Costing is the approach that has the calculation of the product cost and also the time allocation of the product. There is no suffering in additional cost as compared to the ABC system. The Time Drive Activity Costing improves the value and the resource allocation of the company. The TDABC also enhances the functionality by handling the more complex transactions than the Activity Based Costing System. With the power of controlling the complex functions, the TDABC can feel the changes in salary and other related products. Due to additional of the time driven factor, the TDABC system is suitable for logical decision making than ABC system (Szychta, 2010). The Time Driven Activity Based Costing is also used in the rational analysis of the cost and time. This forms part of the best tool for the analysis
Conclusions
The ABC system is one of the best management systems that should be implemented in the management system of the companies. The AGL energy company is expected to benefit a lot from the implementation of the ABC system. Due to the benefits mentioned in the entire report, the top managers should be in a position to have a faster application. It is considered useful because of its cheapness compared to the traditional method of management. The system will also help in the quick decision making of the company. Challenges faced due to its implementation will be solved by the use of the manuals which will later be provided. The Activity Based Costing is accessible and affordable in its application. The quality and efficiency of the management of the company are assured. The system can be computed in different categories within the processes.
References
Christopher, M. (2016). Activity Based costing. Logistics & supply chain management. Pearson UK.
Dale, B. G., & Plunkett, J. J. (2017). Quality costing. Routledge.
Drury, C. M. (2013). Management and cost accounting. Springer.
Gervais, M., Levant, Y., & Ducrocq, C. (2010). Time-driven activity-based costing (TDABC): An initial appraisal through a longitudinal case study. Journal of Applied Management Accounting Research, 8(2), 1.
Goetsch, D. L., & Davis, S. B. (2014). Quality management for organizational excellence. Upper Saddle River, NJ: pearson.
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Hoozée, S., & Bruggeman, W. (2010). Identifying operational improvements during the design process of a time-driven ABC system: The role of collective worker participation and leadership style. Management Accounting Research, 21(3), 185-198.
Horngren, C. T. (2009). Cost accounting: A managerial emphasis, 13/e. Pearson Education India.
Krutz, R. L., & Vines, R. D. (2010). Cloud security: A comprehensive guide to secure cloud computing. Wiley Publishing.
Szychta, A. (2010). Time-Driven Activity-Based Costing in Service Industries. Social Sciences (1392-0758), 67(1).
Tsai, W. H., & Hung, S. J. (2009). A fuzzy goal programming approach for green supply chain optimisation under activity-based costing and performance evaluation with a value-chain structure. International Journal of Production Research, 47(18), 4991-5017.
Tse, M., & Gong, M. (2009). Recognition of idle resources in time-driven activity-based costing and resource consumption accounting models. Journal of applied management accounting research, 7(2), 41-54.
Zang, A. Y. (2011). Evidence on the trade-off between real activities manipulation and accrual-based earnings management. The Accounting Review, 87(2), 675-703.
Zott, C., & Amit, R. (2010). Business model design: an activity system perspective. Long range planning, 43(2-3), 216-226.
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