Explanation of the Activity Based Costing and its Features
You are required to prepare a report to recommend about ABC model for your company.
Lately, Woolworths Company has expanded its operations in working to ensure that buyers get goods of high value and in a simple manner. For example, the CEO announced that the company is establishing Melbourne Fresh Distribution Centre in the attempt to serve more buyers. In doing this, a lot of money is needed which requires that accounting methods used should be good suitable enough. The board of directors has therefore asked for information, concerning the Activity Based Costing, in finding out whether the model would improve finance usage, in meeting the demands of their buyers. In fact, the company has faced issues with its suppliers and retailers, which affected the long-term goals of the organization in the industry. Therefore, the paper aims to find out whether the ABC Model is useful to the company in ensuring that accounting management systems are improved, which would boost the company’s operations.
The Activity Based Costing (ABC) is an accounting methodology that allocates manufacturing overhead costs to goods in a logical aspect, other than the traditional method which put costs according to machine hours. The model was developed in the 1980s, by Kaplan and Bruns, and up to date, it is used by organizations, in costing absorption which has made managers get a better understanding about goods and customer net profitability (Dale and Plunkett, 2017). By the use of the model, organizations get better information which is helpful in making value-based and effective decisions. Notably, the approach put most of the attention towards cost drivers or the aspects that makes costs to increase. Unlike the traditional ways that insisted on volume related aspects, for example, labor hours, the activity-based costing makes use of the transaction based drivers like the number of figures received. With that, it becomes possible to determine long-term variable overheads.
One of the features of the model is that it divides the costs incurred into two that is short and long-term variable costs (Laviana et al., 2016). Kaplan and Bruns said that diving is necessary as all costs incurred in an organization are variable, though only the variable costs are variable in the short period. The fixed costs or the long-term variables do not vary but not instantly. Where the costs are divided, the management gets useful information in designing the right cost system to be used by the company. The other feature of the model is that it establishes a clear distinction between cost behavior patterns. In most cases, cost behavior patterns are drawn according to the volume, diversity, events and time relations. The feature is useful in making sure that the leadership team determines the costs that are constant and those that are changing in determining the amount of money used for each product (Arli et al. 2013). . Also, it is the cost drivers that influence the cost pattern expected. Cost drivers are aspects that determine the prices for products, which are assessed and offer insight into the cost patterns that ensure that decisions made by the management are appropriate. The aspect of overheads is also vital in understanding how ABC works. In determining cost drivers, overheads in each product are traced.
Explanation of How the ABC Aligns With Strategies of the Organization
While allocating overheads, short and long-term divisions are highly used. For example, the short-term variables are put to goods based on volume related price drivers. Examples are labor and material costs as well as machine hours. The model insists that short-term variables are not suitable for allocating long-term variables as the latter is influenced by many factors making them complex (Oseifuah 2018). This is to say that the causes for the overhead costs ought to be comprehended based on the types of activities associated with the production and service sectors. Based on the said characteristics of the ABC model, it is clear that the approach has several aims in every organization. One is to correct wrong costs information, by dividing the costs into two for simpler assessments. The other objective is to allocate overheads that are based on activities, which are helpful in ensuring that prices allocated to goods are specific. Lastly, there is the role of helping the management take quality time before making decisions relating to the business (Hoozée and Hansen 2017). With these objectives, the ABC model has become useful in many organizations, mostly those with complex activities and thus need a reliable methodology in managing its accounts.
Identification of the Mission of Woolworths
Woolworths Company’s mission is based on integrity where it aims to offer goods that are convenient, with high value as well as quality to the customers (Cocks 2009). This has been ensured by employees 205, 000 people to serve about 29 million customers in every week. Many local farmers and manufacturers have trusted the organization based on the mission.
Objectives of Woolworths
Woolworths have developed several objectives that all involved stakeholders are working to achieve. One is establishing a buyer and store led culture of teamwork (Juan et al., 2014). In this aim, the organization works to ensure that the company and the buyers have a similar culture in maximizing their relations (Wahyuni 2010). The other objective is on forming sustainable sales momentum in the food industry. Also, there is the aim of improving its drinks business to offer goods of more value and convenient to the buyers. Also, the organization works to empower its organizational portfolio to ensure that its business strategies are achieved that would boost shareholder value (Shauki 2016). Lastly, the business aims to become a lean retailer by the end to end process as well in system excellence. In short, Woolworths aims to ensure that customers get the goods they need, which are of high value and convenient. In meeting these objectives, the company would work based on its mission.
Explanation of How the Activity-Based Costing Could Assist Woolworths in Achieving Goals
Corporate Strategies of Woolworths Company
The corporate strategies for Woolworths Company are based on three aspects, that is a product, pricing, and promotional factors. In product strategy, the company is aware that buyers need fresh, quality and affordable goods. On the other hand, new goods that have been offered by competitors have attracted more customers into the company. With that, the organization aims to develop innovative goods that would lead to a higher customer base to the company, in ensuring that growth of the company is ensured (Roper and Fill 2012). The other strategy is on pricing, where Woolworths Company has faced issues as Aldi has offered goods of the same quality as Woolworths but at lower prices (Dos Santos et al., 2013). The company has thus strategized to implement a competitive pricing strategy by cost-cutting so that the customers do not prefer Aldi over Woolworths (Cacioppe et al., 2008). Besides, there is the promotional strategy, where the company has faced tough market rivalry from the companies offering similar or complementary goods. In doing this, the organization has to implement better communication methods in advertising, to ensure that customers stick to buying from the company (Walters and Rainbird 2014). Where the three corporate strategies are met, it would be possible for the company to grow and increase its profit.
Explanation of How the Activity-Based Costing Could Assist Woolworths in Achieving Goals
Based on the mission, objectives and corporate strategies for Woolworth, ABC Model is useful to the company, in achieving its goals. As said before, the model helps companies in allocating overheads to goods in determining costs drivers and patterns. This makes the management make appropriate decisions concerning the organization. Woolworths Company has had the problem in pricing, which has led to its rival companies offering cheaper goods that have attracted more buyers. In that case, the company needs to cut costs for goods, to get a competitive pricing benefit, where the ABC model would play that role. With the model, the company would allocate overheads and thus determine the cost drives in every output involved, and therefore get the needed knowledge while making decisions.
Woolworths Company would also use the activity-based costing in meeting its mission, which is based on integrity. ABC is useful in correcting mistakes regarding costs information. For example, the company aims to offer convenient and goods of high value, but goods offered at the moment are not innovative. By the use of the ABC model, the management would align the business strategies to its operations in making sure that goods offered are based on the integrity of the business. Also, the company would use the model in meeting its corporate aims that would benefit both the organization and the buyers. For example, where the promotional strategy is implemented, the company would increase its sales while the customers would get goods that are of high value and convenient. ABC model helps in this by the decisions made by the management. Therefore, Woolworths Company should implement the ABC model in its operations, in making sure that the few issues affecting the organization are solved.
Recommendations for Implementing of ABC to Woolworths Company
Since it is clear that ABC model is useful to Woolworths Company, several recommendations are necessary for making sure that the aimed benefits are attained. One is in training, where both the management and the workers ought to be directed. For a model to be useful to an organization, stakeholders involved should know how the model is used and the expected outcome. Therefore, the Woolworths management should have information about the model and communicate to workers. Development of objectives is also necessary, in making sure that the said strategies are in line with operations as measurement strategies are evident. One of the appropriate objectives would ensure increased customer volume since the goods would be offered at affordable prices. This is to say that the management should get skills in using the model and develop objectives to be met in a certain period.
Alternative Management Tool Suitable For Woolworths Company
Just like other models, the ABC approach has several limitations that would be avoided by using an alternative management tool. For example, where operations are evaluated based on activities like the model insists, workers waste time through breaks. To curb this, the time based costing is the most suitable model for Woolworths Company. With this option, the management would keep track of activities and set time in which the activities should be complete. One of the benefits of using this model is that planned activities are met on time (Öker and Ad?güzel 2016). For example, if the pricing strategy should be implemented in three months, the time-based costing ensures that the deadline put is met, to ensure that the following action takes place. In fact, time is vital in an organization as it ensures that activities take place as planned and therefore leading to the attainment of objectives (McCreary et al., 2018). Therefore, where the time based costing is used as an alternative method, the company would attain its strategies as the issues caused by the activity based model are resolved.
Conclusion
As discussed within the reports content, it is evident that activity based costing is one of the most appropriate models that organizations should adopt. Based on the alignment of activity based costing model with the mission, vision and corporate strategies, Woolworth should adopt the ABC model for proper accounting and financial management. Application of this new model with enable the organization to cover all costs and maximize the profit in all seasons.
References
Arli, V., Dylke, S., Burgess, R., Campus, R. and Soldo, E., 2013. Woolworths Australia and Walmart US: Best practices in supply chain collaboration. Journal of Economics, Business & Accountancy Ventura, 16(1).
Cacioppe, R., Forster, N., and Fox, M., 2008. A survey of managers’ perceptions of corporate ethics and social responsibility and actions that may affect companies’ success. Journal of business ethics, 82(3), p.681.
Cocks, G., 2009. High performers down under lessons from Australia’s winning companies. Journal of Business Strategy, 30(4), pp.17-22.
Dale, B.G. and Plunkett, J.J., 2017. Quality costing. Routledge.
Dos Santos, M.A., Svensson, G. and Padin, C., 2013. Indicators of sustainable business practices: Woolworths in South Africa. Supply Chain Management: An International Journal, 18(1), pp.104-108.
Dos Santos, M.A., Svensson, G. and Padin, C., 2013. Indicators of sustainable business practices: Woolworths in South Africa. Supply Chain Management: An International Journal, 18(1), pp.104-108.
Hoozée, S. and Hansen, S., 2017. A comparison of activity-based costing and time-driven activity-based costing. Journal of Management Accounting Research.
Juan Ding, M., Jie, F., A. Parton, K. and J. Matanda, M., 2014. Relationships between quality of information sharing and supply chain food quality in the Australian beef processing industry. The international journal of logistics management, 25(1), pp.85-108.
Laviana, A.A., Ilg, A.M., Veruttipong, D., Tan, H.J., Burke, M.A., Niedzwiecki, D.R., Kupelian, P.A., King, C.R., Steinberg, M.L., Kundavaram, C.R. and Kamrava, M., 2016. Utilizing time?driven activity?based costing to understand the short?and long?term costs of treating localized, low?risk prostate cancer. Cancer, 122(3), pp.447-455.
McCreary, D., White, M., Vang, S., Plowman, B. and Cunningham, B., 2018. Time-Driven Activity-Based Costing in Fracture Care: Is this a More Accurate Way to Prepare for Alternative Payment Models?. Journal of Orthopaedic Trauma.
Öker, F. and Ad?güzel, H., 2016. Time?driven activity?based costing: An implementation in a manufacturing company. Journal of Corporate Accounting & Finance, 27(3), pp.39-56.
Oseifuah, E.K., 2018. Activity-based costing (ABC) in the public sector: benefits and challenges. Management, 12, pp.4-2.
Roper, S. and Fill, C., 2012. Corporate reputation: brand and communication. Harlow: Pearson.
Shauki, E., 2016. Is This a Case of Self-Enlightened Interest or Genuine Accountability: A Study on Different Reporting Media in the Australian Retail Industry. Asia Pacific Journal of Accounting and Finance, 2(1), pp.51-76.
Wahyuni, D., 2010. The importance of supply chain management in competitive business: A case study on Woolworths.
Walters, D. and Rainbird, M., 2014. The demand chain as an integral component of the value chain. Journal of consumer marketing, 21(7), pp.465-475
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