The importance of choosing an appropriate costing technique
In todays world’s, the business environment is going at an increasing pace and most of the business are focusing on making more and more profits. In such a situation, as the sales of the business increase so does the variable costs which are associated with the sale. Therefore, it is very important for the business to choose an appropriate costing technique which can effectively record and analyze the costs of the business. The treatment of overhead costs of the business are important aspects which needs to be considered by the management and appropriate allocation of such costs are also important. In the new era of modernization, most of the business are utilizing activity-based costing techniques for the purpose of identifying and allocating costs of the business (Stefano and Casarotto Filho 2013). Traditional costing techniques are unable to keep up with the changing environment of businesses and therefore activity-based costing techniques helps businesses to overcome the deficiencies of traditional costing techniques and also helps in decision making process of the business.
Activity based costing techniques allows business to effectively apportion the costs of the business which are indirect in nature on the basis of the activities which are undertaken by the business for production the products of the business. Activity based costing is also applicable for organizations which are engaged in the manufacture of multiple products of a business (Estampe et al. 2013). Activity based costing techniques of a business allows the management of companies to identify the costs and its respective activity and allocate on the basis of the same (Kaplan 2014). The working process of activity-based costing technique is unique in nature than traditional costing techniques which only considers machine hour as the basis for allocating the costs of the business. In case of activity-based costing the nature if activity is considered and then the respective cost unit is identified by the business.
Activity based costing is an efficient way of allocating costs to respective cost drivers of the business and also helps in the decision-making process of the business. Activity based costing techniques also plays a vital role in setting the selling price of the products which are manufactured by the business. In details, Activity based costing the costs which are incurred by the business are classified on the basis of short term costs and long-term costs of the business (Frazier 2014). The short term costs of the business are generally allocated on the basis of the volume related cost drivers of the business. Some of the examples which can be provided for volume related cost drivers are machine hours, labour hours and direct material cost. In case of long-term variable costs, the first step is to identify and analyze the nature of the costs and the activity which incurs such costs (Donovan et al. 2014).
Understanding activity-based costing techniques in business
The objectives of Activity based costing in a business environment are listed below in details:
- The new costing system aims to rectify the inaccuracies of the traditional costing system which is related to recording a cost of the business.
- The method aims to improve the allocation of costs of the business which can be done by linking the costs which is incurred by a business to its respective activity.
- The method also focuses on helping the management of a company to effectively take decisions regarding the costs of the business and also deciding the selling price of the product (Laguna and Marklund 2013).
- Activity based costing brings about more effective disclosures of costs of the business and also improve the costs structure of the business.
In order to effectively analyze the system of Activity based costing, research papers written by different authors are considered. The journal article will further explain the application and usefulness of Activity based costing in a business. The journal article which are considered for this assessment are listed below:
Article 1: “Activity Based Costing in Services Industry: A Conceptual Framework for Entrepreneurs”
Article 2: “Activity based costing (ABC) in the public sector: Benefits and challenges”
The above journal deals with organization which operates in different sector entirely. The journal article portrays and gives more insights into the process of Activity based costing.
Evaluation of Journal Article 1
As per the journal paper, the focus of the researcher is on a service sector industry. Just as the business engaged in manufacturing industry has attained growth in recent years so has the service sector industries in the country. The author has effectively identified that in the changing environment, the overall increase in the scale of operations results in tremendous increase in the costs which are associated with the business. Most of the businesses suffer from problems in managing the profit margins and cost of the business (Ross 2016). Therefore, it is an essential requirement of businesses to select an appropriate cost management system which can effectively and accurately show the costs which re incurred by the business during the year.
The research paper shows the costing techniques which are used in a business environment and how the same can reported and used for the decision-making process of the business. The journal paper effectively describes the Activity based costing and the key steps which are followed by businesses for identifying the cost components and also the key cost drivers of the business. The research paper further shows that the points of difference between t6raditional costing system and Activity based costing system (Onat, Anitsal and Anitsal 2014). The main deficiencies of the traditional costing system which can be identified is that the costing process is unable to detect non-financial factors which can affect a business, inaccurate cost information which is generated by the traditional system. The journal paper specifically identifies that traditional costing system is inappropriate for a business which is engaged in service industry. Therefore, the researcher is of the opinion that Activity based costing is best available option for service sector business in order to effectively treat the costs which are incurred in a service sector business. The journal paper highlights certain advantages which is related to application of Activity based costing in a service sector business which are brings about better presentation of the costs of the business, cost reductions, improve the costing for the product and also helps in the decision-making process of the business.
Benefits of activity-based costing in business
Thus, the above discussion effectively shows the superiority of Activity based costing in comparison to traditional costing system. The advantages of Activity based costing are effectively shown by the researcher in the journal paper and outline the reasons due to which service sector enterprises can effectively implement such a process (Dumas et al. 2013). The analysis also reveals the process which is applied while following Activity based costing in a business. The further research question which arises from the analysis of the journal paper are listed below:
- How does Activity based costing helps in a decision making process?
- Detailed analysis of the difference which exist in a business which is using traditional costing system and a business which is using Activity based costing
- What are the relevant cost drivers which can be identified in a service sector industry?
Evaluation of Journal Article 2
As per the Journal which is shown in the research paper clearly shows the comparation which is shown between traditional costing system and Activity based costing system when applied in a business. The journal also lists out the advantages which are associated with the method of Activity based costing. The journal shows the implementation of Activity based costing technique in a public sector enterprise.
The problem statement of the research paper shows that many of the researchers and academician are of the opinion that Activity based costing are only useful in businesses which have large business size and has a large scale of operations or on a business which is engaged in the production of multiple goods or products or offer various services to the customers. However, the use of Activity based costing is much more extensive than what is initially portrayed. The assessment considers a public-sector enterprise which is engaged in providing services to the general public and the services which are provided are mainly overhead intensive and therefore the researcher is of the opinion that Activity based costing is a best option for such sector (Oseifuah 2014). The researcher further states that implementation of such costing practice will bring about transparency and accountability of the enterprise. The research is conducted considering the public-sector enterprises which are operating in South Africa and which are the grass root for service delivery in South Africa. The research aims to analyze how Activity based costing can be effectively implemented in the public-sector enterprises in South Africa.
The journal paper explains the process of traditional costing and how the same is applied in business. The traditional system of costing is often developed and implemented in businesses which has either a job process or a process costing system in place. The costs are allocated and divided on the basis of product which are direct expenses in nature and on the basis of period which are generally indirect in nature (Warren, Reeve and Duchac 2013). The apportion of cost is done on the basis of volume-based cost driver which may be machine hours. The deficiencies which are present in the traditional costing system are also highlighted in the journal paper.
Objectives of activity-based costing
The above figure is taken from the journal article and the figure aims to show a comparative analysis between the system of Activity based costing and Traditional costing techniques (Cooper 2017). On the basis of the analysis which is included in the research paper further research questions which can be developed are listed below:
- How can Activity based costing be implemented in a public-sector organization and how can the respective costs be identified?
- Can Activity based costing be applied to other businesses which are not in large size or does not have multiple product lines?
- What are the additional benefits which can be derived from application of Activity based costing in a public-sector organization?
The analysis of the two articles which is shown above reveals certain similarities and dissimilarities which are present which are listed below in details:
Similarities
- Both the articles which are considered for the assessment deals with the application of Activity based costing in different sector and how the same can bring about improvements in the reporting framework of the business. The application of Activity based costing in the organization or sector can bring about improvements and accurate estimation are justified in the assessment.
- The articles which are considered in the assessment both show the deficiencies which are present in the traditional costing system and also how the application of Activity based costing can remove such deficiencies. Both the article makes comparison between the traditional costing system and the modern Activity based costing system which can bring about improvements in a business.
- The advantages of using Activity based costing as a costing technique in the business are listed out by both the articles. Both the article focuses on strengthening the analysis which is shown in the research papers with the benefits which are associated with the use of Activity based costing.
Dissimilarities
- In both the paper the company which are considered belong to entirely different industry and this is the biggest difference between the two articles as the business structure or even the cost items might not be the same for both the companies or sector considered. In the first article, the company which is considered is engaged in service sector industry and so basically the author emphasizes more on service sector businesses. In case of second article, the emphasis is more on the public-sector enterprise.
- The analysis in both the articles considers different businesses which are engaged in different service rendering and even the country in which the business operate are also different.
The analysis of the two research papers which is shown above effectively demonstrate the usefulness of Activity based costing in a business. The positives which are derived from the journal papers can be suggested to the management professionals who are working in Australia so that they can also bring about the desired improvement in the business structure of the companies. The specific outcomes are listed below in details:
- Superiority of Activity based costing over Traditional Costing System: The traditional costing system which is followed in Australia needs to be revised and replaced with Activity based costing system as the same can bring about significant changes in the reporting framework which is followed in Australia. It is especially recommended for business which have large scale of operations or businesses which are engaged in production and distribution of multiple product lines. In such cases, it is anticipated that Activity based costing can bring about better reporting for whatever costs which is incurred by the business (Drury 2013). The analysis of journal reveals the weakness which are three in traditional costing system which can be effectively dealt with as Activity based costing system is introduced in businesses. The analysis also sets out other issues which are associated with traditional system of costing in a business and therefore the same needs to be replaced immediately.
- Decision-Making Process: The implementation of Activity based costing is also anticipated to bring about efficiency and accuracy in the cost structure of the business. Thus, there are major advantages which can be utilized if the businesses in Australia implemented Activity based costing. One of the advantages of implementing Activity based costing system in a business is that it improves the decision-making process of the business as the management of the company has all the relevant and accurate cost information for the period and thereby makes the decision-making process of the business easier. In addition to this, the costing system has also an important role to paly in the setting of prices of goods or services which is offered by the business (Santini 2013). The accurate cost results which are shown by the costing system are often less and therefore in a way also leads to reduction of overall costs of products and services which is offered by the business.
- Identification and Allocation of Costs: The new costing system which is becoming popular in recent times also requires identification of costs and also allocation for the same. The apportionment of cost under this system is more appropriately done which takes care of the deficiencies which were present in the traditional costing system of the business. The application of Activity based costing can also be done in a service sector business as per the analysis which is conducted on the journal articles which are shown above. The new technique of Activity based costing allows businesses to allocate costs on the basis of the different activities which are undertaken by the business for producing goods or rendering the services. The presentation of costs which is shown under Activity based costing system is more reliable and therefore most of the businesses in Australia needs to incorporate the practice in the management accounting system of the business.
- Cost Management:The Journal papers which are considered for this assessment emphasizes the usefulness of Activity based costing in a businesses organization. The entities in Australia will greatly benefit from the same as the technique allows management to identify the cost drivers and responsibility units in a better way. In addition to this, it allows management to identify the costly activities and unproductive overhead costs and thereby allows them to reduce the same. Therefore, Activity Based costing will be useful in cost management practice in Australia.
Thus, from the mentioned points which are positives which can be derived from the analysis of the two journal articles can be incorporate by the management of companies in order to improve the reporting framework of the business which is in relation to the costs of the business.
Conclusion
Thus, from the above discussion regarding the costing technique of Activity based costing, it is clear that in coming time the technique will be applied by most of the business for the purpose of recording the costs of the business. The report shows analysis of two articles which are considered in the assessment relating to different sectors where Activity based costing can be applied and the same has also been a success. The report draws out the positives and future scope of research questions which are available for research. In addition to this, the report also shows comparative analysis of the results which are obtained from the analysis of the two articles. The report systematically discusses the similarity and dissimilarities between the results which are obtained from the two articles which are considered for this assessment. In the concluding part of the assessment. The key results which are established from the analysis of the two journal articles considered and the same is suggested to the businesses which are operating in Australia in order to bring about improvement in their reporting structure as well.
Reference
Cooper, R., 2017. Target costing and value engineering. Routledge.
Donovan, C.J., Hopkins, M., Kimmel, B.M., Koberna, S. and Montie, C.A., 2014. How Cleveland Clinic used TDABC to improve value. Healthcare Financial Management, 68(6), pp.84-89.
Drury, C., 2013. Costing: an introduction. Springer.
Dumas, M., La Rosa, M., Mendling, J. and Reijers, H.A., 2013. Fundamentals of business process management (Vol. 1, p. 2). Heidelberg: Springer.
Estampe, D., Lamouri, S., Paris, J.L. and Brahim-Djelloul, S., 2013. A framework for analysing supply chain performance evaluation models. International Journal of Production Economics, 142(2), pp.247-258.
Frazier, W.E., 2014. Metal additive manufacturing: a review. Journal of Materials Engineering and Performance, 23(6), pp.1917-1928.
Kaplan, R.S., 2014. Improving value with TDABC. Healthcare financial management, 68(6), pp.76-84.
Laguna, M. and Marklund, J., 2013. Business process modeling, simulation and design. CRC Press.
Onat, O.K., Anitsal, I. and Anitsal, M.M., 2014. Activity Based Costing in Services Industry: A Conceptual Framework for Entrepreneurs. Entrepreneurial Executive, 19.
Oseifuah, E.K., 2014. Activity based costing (ABC) in the public sector: Benefits and challenges. Problems and Perspectives in Management, 12(4), pp.581-588.
Ross, D.F., 2016. Introduction to e-supply chain management: engaging technology to build market-winning business partnerships. CRC Press.
Santini, F., 2013. Strategic Management Accounting and financial performance in the small and medium sized Italian manufacturing enterprises. Management Control.
Stefano, N.M. and Casarotto Filho, N., 2013. Activity-based costing in services: literature bibliometric review. SpringerPlus, 2(1), p.80.
Warren, C., Reeve, J.M. and Duchac, J., 2013. Financial & managerial accounting. Cengage Learning.
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