About ABC
This report is developed for creation of knowledge about importance of Accounting methods followed for key business activities such as cost budgeting, forecasting the cost, and several other cost related methods. This report will throw light on how the validity of the Activity Based Costing method of implementation of managerial accounting in certain sectors of Australian economy, and how useful it has been. It will help us to know if some serious and effective cost control methods have come to light after the implementation of this method of accounting, and if yes, then how have they impacted the organization or the industry. In addition to this the report will focus on the developments that have happened in the respective fields because of this and how have these developments really affected the ongoing practice of accounting as well. The final section of the report will focus on the outcomes of the analysis and summarising the findings we have analysed so far.
ABC or Activity Based Costing is defined as a method of cost accounting which deals with accounting for all the activities that take place along with the overhead cost to account for the total cost of the process. The focus here is given on all of the activities that happen during the production of the goods and the subsequent allocation of funds. All the overheads and extra costs that go into it are also accounted for (Emmanuel and Oseifuah, 2014). It is said to be one of the most comprehensive models of accounting as it gives the cost to smallest of actions.
Activity Based Costing is one of the most comprehensive concepts of accounting. Here, the cost is divided into two broad terms: production costs and overheads associated with it.
These two costs are divided based on the kind of activity which will be performed, the resources required for these costs (Mahal et al., 2015). This method is so widely chosen over methods because it gives in detail where and how all the expenses will happen and then further helps in rationing the cost so that the cost can be cut, thus, making it a better financial management activity. In all, it helps the company to understand the true nature of costs associated with the goods (Conny, 2018).
The benefits of ABC analysis are the following:
- Helps in identifying the products which are not profitable
- Helps in improving the production efficiency
- helps in the pricing strategy and pricing the products appropriately
- helps in identifying the eliminating factors for costs and operations
We shall now focus on the two case studies at hand to further understand the process of ABC accounting and its implementation procedure as well.
In order to better evaluate and understand the ABC analysis, we will now study two research articles in detail and how the situation set against them will help us in knowing more about this accounting process.
The first paper is titled, “Implementation of the Activity-Based Costing Model for a Farm: An Australian Case” by Lu et al. (2016). This research paper discusses the implementation of Activity Based Costing in a few Australia based farms and discusses how it came about. Agriculture is a production type which exclusively works on production done, and hence, because of its production centric nature, Activity Based Costing will serve as the ideal technique and will allow the basic understanding of how costing of agriculture goods is always a challenge (Michael and Shields, 2015).
Benefits of ABC analysis
Thus, in this study, the ABC model has been applied in order to study how it has helped in not only proper costing of the goods, but also determining the actual money which goes in and where, and how can it be eliminated.
The objectives of the study are:
- To develop an understanding of how the ABC model can be implemented in farms and,
- To examine issues associated with the implementation of the ABC model in farms.
These findings have been well substantiated suing certain statistical and quantitative approach, but that is something which is beyond our concern (Leslie et al., 2017).
The second study concerns itself with a more general and spread application of Activity Based Costing in Australia, reaching all spheres of business and industries. The study is titled, “Is ABC Adoption a Success in Australia?” by Byrne, et Al.,(2009). This study explores if Activity-Based Costing method was actually successful in an organisation where it has been implemented fully or was it just a sham, allowing no benefits for the company whatsoever.
The study is exploratory in nature with proper and enough substantial backing for all the results obtained.
The research question for this study is:
- This research draws on the “success” proxies (attitudes and satisfaction) developed by McGowan (1998) (which were based on Shields (1995) approach to defining ABC success) and,
- Qualitative a priori success measures suggested by Foster and Swenson (1997).
Objectives of the study are: this study seeks to explore the perceived success or otherwise of ABC in those organisations in Australia where it has been fully implemented.
The first paper is titled, “Implementation of the Activity-Based Costing Model for a Farm: An Australian Case” by Lu et al. (2016). This research paper discusses the implementation of Activity Based Costing in a few Australia based farms and discusses how it came about.
Agriculture is a complex process and it is because of this the costing is a little difficult for agricultural products. It is not only because of the reason that is attributed to the cost of the resources or the raw material that goes in it, or the fluctuating subsidies by the government but it is also relevant to various other factors such as climate, the production growth, quality of the produce, the availability of market and logistics encountered to actually pack of the goods.
While we know that both agriculture and accounting are two very prominent activities which take place in any country, it is essential to overlook their working as well as how will they go about once they collaborate. This makes the process all the more essential, and gives a very unbiased view of how things might pan out, possible effects of one on the other and how can any risk encountered in this process be mitigated or controlled without any damage. The collaboration of these two extremely diverse sectors is seldom, and this study is the bridge between this collaboration (Leslie,2017).
Agricultural scientists have been focussing on improving the quality of their work by ensuring that they bring in various scientific and economic models and theories and implement them in practice. While the accounting community is more reserved for the big players like hospitality and banking industry. There are several questions which this study answers and takes up, however one of the most prominent ones is: What are the challenges for a farmer in accounting?
Research Study and Purpose
The farming community has long observed a traditional slowdown in managing certain things when it comes to maintaining their costs. Thus, the major challenge is the cost of the agricultural goods themselves. The farmers often face a dilemma as to what exactly do they price the product so that not only do they get their intended profits but are also able to ensure that they do not seem overpriced. With all the technological advancement at their disposal, a majority of their farmers have now cut their labour to half and have been able to ensure best quality produce (Kaplan and Robert, 2015). However, this technological advancement has also helped these farmers cut their costs for which they now live in confusion. Even after cost-cutting, the problem remains as to what is the right cost to be allocated to the goods so that they can ensure that their labour, investment and goodwill all remains. Not just the production cost, but this technological advancement has added to the overhead costs of the agricultural products as well (Jean and Paul, 2015). The produce is evenly spread to many financial periods, right from sowing to harvesting and selling it off, it takes nearly more than seven months for the cycle to come to an end, in a full circle.
Farmers have traditionally opted for simple accounting methods, and have not paid much attention to the possibility of applying other cost methods (Atkinson et al, 2015). This is important because it allows a lot of understanding about the transition that the ABC model has bought here. Previously, the only costs that the farmers often cared about were how much they invested and how much they gained. We are also well aware of the fact that unlike the raw material and the produce obtained, it is difficult to measure the actual physical input of the farmers, and all the work that they have done in order to produce (Syers et al, 2017).
Thus, it was observed that there was no scope for cost-cutting and budgeting left in this traditional accounting system adopted by the farmers. Furthermore, there were several uncertainties which were associated to production, and eventually the cost as well, such as the environment, the condition of the soil, the climate in which the crops grow, techniques of farming and much more. These factors alter the cost of input in the farming and subsequently the cost of the product as well. However, as it’s mentioned above, measuring them becomes an issue because of the current accounting practices (Hussain, 2017).
This research then focuses on implementing this practice for a small’s sample of farmers and observing how their cost-cutting was then observed. Keeping these observations, it was eventually concluded that the implementation of the ABC model of accounting or Activity Based Costing actually did help the farmers in not only streamlining and improving their operations but also allowed them to better judge their unhealthy expenses and decided about the continuity of various products and practices as well, after seeing them under the ABC light of course. Thus, in this case, ABC has worked successfully as expected for Australian farmers.
Paper 1
Unlike the previous study which aimed at introducing the ABC model to an industry, this study aims to evaluate and analyse the ABC model already in work in the certain organisation and judge its effectiveness (Lu et al., 2016).
Going on lines of the United States of America, the Australian researches focused on conducting a research which allows understanding the Activity-Based Costing method of accounting in detail and if it does actually work or not. The study relates to itself with a more general and spread application of Activity Based Costing in Australia, reaching all spheres of business and industries. The study is titled, “Is ABC Adoption a Success in Australia?” by Byrne et All.,(2009).
The research question for this study is:
- This research draws on the “success” proxies (attitudes and satisfaction) developed by McGowan (1998) (which were based on Shields (1995) approach to defining ABC success) and,
- Also on qualitative a priori success measures suggested by Foster and Swenson (1997).
It is long known about the effectiveness of ABC model in asserting the cost associated and subsequent focus on developing a framework which allows in-depth study and details about the cost-cutting abilities of the company, and it helps them in predicting several other things as well.
There are certain well-developed companies in Australia who are at the echelons of their respective industries, however, considering the stiff competition and economic instability that surrounds all our nations, it is important as well as advised to control the costs in order to make better profits for the company. Once the cost invested in under control, the cost that comes in will fall directly in its place (Emanuel,2014).
Objectives of the study are: this study seeks to explore the perceived success or otherwise of ABC in those organisations in Australia where it has been fully implemented.
The study has furthered defined what exactly success means in this context and how does it come to terms with ABC as well. When we talk about the success of the ABC model, the major focus is on the following factors, against which it is measured:
- ease of decision making
- ease of implementation
- growth in dollar value
- money saved
- money earned (Byrne, 2011)
If a company has a positive affirmation to all of the above factors, then the ABC model in that company is said to have been working well. However, these factors have been criticised for being too empirical in nature and do not serve the actual purpose of their being. These factors though valid, but were not enough to judge the viability of a concept and hence the theory based on them were immediately discarded as well.
However, there was other evidence which suggested that the ABC model has been just fine to be implemented and that it has indeed helped the companies a lot in its pursuits of achieving everything (Cushion and Thompson, 2016).
Everything that was obtained from this eventually had to reflect elsewhere in the organisation under these other parameters of judging the success of the ABC process. Basically, these factors were: job satisfaction, employee engagement, less wastage of resources, and allowing a complete control over the utilisations of recourses as well.
Furthermore, six stages of the implementation of the ABC process were identified and implemented. They are:
- initiation: here the feasibility analyses of the process is done
- adoption – here, the decision to invest in some level of resources is made
- Adaptation: here the decision to further adapt and involve the key drivers of the working of the organisation is done. ABC comes into the picture in this step.
- Acceptance: the results obtained are accepted by the managers
- Integrations: to allow the ABC model to integrate with the accounting system of the company fully
For the purpose of this research, manufacturing industries and companies under it were taken. However, the results which were obtained were quite as expected and eventually settled a lot of dust as well. There were several reasons as to why this model was accepted by the people such as improved communication, improved strategy, reliability, improved information better decision making and more.
Paper 2
It was eventually observed and concluded that the companies in the manufacturing sector of Australia which implemented the ABC process eventually made more profits and were able to better budget their costs. The model was a success on the Australian manufacturing industries and hence, there were very few instances which indicated that the model would be or is a failure. Considering all these factors and explanation, it was eventually found in the research that companies with ABC model ended up saving 12% of the cost and the revenue increase for these companies as compared to the one who did not implement this model (Becker et al, 2015).
After analysing both the studies in detail, it can be very safely said that ABC model was a success on both the manufacturing industry as well as the agricultural industry of Australia, and was able to sustain itself well. The model was well applied in both these industries and was a game changer as well (Shields, 2015). Also, add to it the increase in revenue. There were several take-ups away from both studies, however, we shall outline more details of the outcomes in order to gain a better perspective about it and understand the importance of the process in detail:
- For agricultural industries, this model worked well because it was able to quantify something abstract like the labour of the farmer and give it a number to associate it to the cost. That unlike the raw material and the produce obtained, it is difficult to measure the actual physical input of the farmers and all the work that they have done in order to produce. Thus, allowing something like this to be quantified was the game changer here, and probably enough as well.
- Second in this study, several of factors which hamper agriculture were identified like such as the environment, the condition of the soil, the climate in which the crops grow, techniques of farming and much more. These factors alter the cost of input in the farming and subsequently the cost of the product as well. ABC could analyse this and eventually ward off the effect of these factors
- For study 2, the major outcome was that ABC analysis help in forecasting several economic effects on the produce of the raw material over time, and how the prices are to be adjusted and how the effects are to be cushioned as well, considering the fragile nature of an economy.
- Lastly, the study reflected how ABC was considered a valid theory after a lot of understanding and consideration and was not accepted arbitrarily. The research and amount of practice put in it was extensive and only after several processes did it get the desired look and sounds of it (Suzanne, 2011). The process thus was able to get enough momentum and was approved by majority business people of the Australian business community.
Conclusion
From the above analysis, it can be concluded that ABC model is one of the most successful accounting methods implemented in the product based industry so far, as it has ensured proper cost allocation and distribution to even the minutes of the entity or resource that goes into the making of the product.
References
Atkinson et al., (2015). Atkinson, Anthony A., Banker, Rajiv D., Kaplan, Robert S., Young, Mark S. Management Accounting, 3rd ed
Byrne, S., Stower, E., & Torry, P. (2011). Is ABC Adoption a Success in Australia? Journal of Applied Management Accounting Research, 7 (1).
Becker, S., Wald, A., Gessner, C. & Gleich, R. (2015). Le rôle des attributs perçus pour la diffusion des innovations dans la comptabilité analytique. Le cas de la comptabilité par activités. Comptabilité – Contrôle – Audit, volume 21,(1), 105-137. doi:10.3917/cca.204.0105.
Jean C. and Paul T. (2015), Financializing and value: why labour and the labour process still matter, Work, Employment and Society 30(2).
Conny, M. (2018). Activity-Based Costing and ABC Management. Retrieved from https://www.business-case-analysis.com/activity-based-costing.html
Emmanuel K. Oseifuah (2014). Activity based costing (ABC) in the public sector: benefits and challenges. Problems and Perspectives in Management, 12(4-2)
Kaplan and Robert, (2015). Kaplan, Robert S. Dakota Office Products. UK: HBS case
Mahal, Ishter & Hossain, Md Akram. (2015). Activity-Based Costing (ABC) – An Effective Tool for Better Management. Research Journal of Finance and Accounting. 6. 66-73.
Michael D. Shields (2015). Established Management Accounting Knowledge. Journal of Management Accounting Research: Spring 2015, Vol. 27, No. 1, 123-132.
Leslie G. Eldenburg, Hema A. Krishnan, and Ranjani Krishnan (2017). Management Accounting and Control in the Hospital Industry: A Review. Journal of Governmental & Nonprofit Accounting: November 2017, 6(1), 52-91.
Lu, C., Sridharan, V. G., & Tse, M. S. (2016). Implementation of the Activity-Based Costing Model for a Farm: An Australian Case. Journal of Applied Management Accounting Research, 14 (2).
Suzanne, B. (2011) “What determines ABC success in mature sites?”, Journal of Accounting & Organizational Change, 7(3), 259-277.
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