Introduction to activity based costing
Managerial costing is an accounting process that considers the aspects of cost of a business. It also reflects the way it is used by the businesses in decision making process. These processes are undertaken by the management which helps them to make decisions to undertake many vast related decisions in management. The accounting process is closely related to cost accounting process(Akinyomi ,2014). Its main functions is to measure, classify , analyse and communicate information to the business managers. These processes are undertaken by the management so that appropriate decisions can be taken for the organisation. This report will concentrate on the method of activity based costing . This can be implemented as a costing method to a business for the purposed of reporting information that is vital to any organisation. The first part would provide a basic idea of the activity based costing . Then it needs to be applied for the same in a business organisation(Tsai et al., 2014).
The assessment will also be analysing two articles which are related to activity based costing practices in an establishment. These journals will shed light on the application of activity based costing in an organisation. It will also illustrate how the same can be useful in a business practice. Apart from this, a section of the report will portray similarities and differences . These similarities and differences will focus on the two journal papers which have been taken as per the requirements of the assignment. The assessment will conclude after showing the benefits that can be achieved if the management team achieves activity based costing.
Activity based costing is a procedure by which an organisation can assign costs in relation to different activities of a business.It is a new and modern method of costing that categorises the actions of an organisation. After such claasification has been done, it then assigns the cost of each activity with respect to all the products and services that fit the pattern of consumptionin relation to each activity. This costing method apportions more indirect cost into direct costs when compared with that of conventional costing. It is essentially a method of accounting which identifies the activities that a firm executes. After such identification, it then allocates indirect costs to cost objects(Monroy, Nasiri & Peláez,2014).
If a company undertakes activity based costing , it can thoroughly evaluate the cost elements of entire products, activities and services. Thiis will provide a great decision making tool to help inform a company’s decisions to either:
- Classify and exclude unprofitable products and services
- Identify and eliminate ineffective production or service proceses .Next assign processing perceptions that lead a better yield on the same product.
In a business organisations, the ABC costing allocates the resource costs of an organisation. It allocates these costs through product activities and services that are delivered to the customers. It is a decision making tool that best understands profitability ,product cost and customer cost on the basis of performing processes. ABC has been mainly used to support decisions of a strategic nature. These strategic decisions relate to pricing, outsourcing and the measurement of initiatives that involve improvement of process initiatives. (Siguenza-Guzman et al., 2014).
Evaluation of scope and Research areas of Activity based costing
ABC can be applicable all throughout business proceses . Its main applications include:
- application throughout the financing, costing and activities of a company
- This method helps identifying unproductive products, departments and activities
- Helps to control the product level as well as departmental level costs.
- Helps identifying unnecessary costs that could be removed(Carli, G., & Canavari, M. (2013)
- Helps setting the price of a product or service .
A controlling principle that makes an ABC effective is that it keeps the end product in kind. There must be a convincing motive that exists to change the existing cost system. The ABC system needs to be warranted on a cost benefit basis, regarding it implementation. It is similar to any other investment(Cannavacciuolo, et al., 2015). Mostly large companies implement ABC using a pilot project approach, IN this approach, a section of the organisation is designated for implementing ABC costing systems. The pilot project can be applied through the process of allocationg actual revenue and expenses. While implementing, the cost drivers of ABC are identified and from those identifications, activity costs are calculated. The success of the pilot project can also be used to authenticate the case on the business side of things for implementing ABC company wide(Charaf & Bescos, 2013) .
The importance and application of activity based costing in management accounting practices in a business can be illustrated with the help of two journal entries that are considered in this study. The journal articles are considered because they help in evaluating the usefulness and practicality of activity based costing practices in business(Nassar, et al. 2013). The articles that are considered for the purpose of this evaluation include:
Article 1-Influence of competition on activity based costing implementation in Nigeria
Article 2- Implementing Activity based costing systems in small manufacturing firms/;A field study
The following paragraphs will continue detail discussion about the articles that are considered as part of this assessment
This journal article focuses on the manufacturing sector in Nigeria and how the influence of activity based costing can help organisations gain a competitive edge over other organisations , especially the ones that produce substitute products. This study scrutinized the impact that the competition had on the Nigerian manufacturing sector on activity based costing.
There is intense competition among the sellers in Nigeria with regards to increasing goals towards an enhancement in market share and sales volume These goals can be accomplished by changing the elements of the marketing mix . The elements of the marketing mix includes price, product, distribution and promotion. The manufacturing companies in Nigeria are presently on the brink of rigid competition at both local and worldwide markets. To stay market relevant, the manufacturing organisations in Nigeria must endeavour to produce a more competitive edge over other organisations ,especially the ones that produce substitute products.( Langmaak, et al., 2013) According to this article, the intensity of competition affects the implementation of costing systems. More intense the competition , more the firms tend to implement more refined cost accounting systems. Less the intensity of competition, more the firms stick to traditional measures.
According to other sources, there have been found to be different results while studying the influence of competition on activity based costing. These results are very much different than what the expected results would be There are not so many companies in Nigeria that do implement activity based costing. The ones that do have a much lower percentage of export sales and a lower number of competitors. (Kali?anin, & Kneževi?, 2013). As per another set of results, it is found that indicate that this study is in uniformity with a popular expectation. The expectation includes the fact that the percentage of export turnover and the change in competition practices are significantly greater while being compared to the companies that employ ABC implementers than the companies that do not employ ABC. Preceding studies have reported that while considering both local and international markets ,the manufacturing segment in Nigeria are on the cusp of facing demanding competition from local and global competitors (Rundora, Ziemerink, & Oberholzer, 2013). However the effect of competitive force regarding the implementation of ABC on the manufacturing segment in Nigeria has not been identified.
Analysis of Article 1
This article also examine the relations between behavioural, organisational and technical diversity factors and the sources of ABC implementation. When incorporating these factors into context, it can be found that competition can significantly influence the implementation of activity based costing system. The higher the competition level , the more likely it is for the organisation to implement ABC. This implementation will help the company in gaining a competitive edge over its competitors(Pazarceviren & Celayir, 2014). This intense competition is forcing the companies to pay a more stringent attention to cost, quality and time. A sample survey of companies in Nigeria was conducted. It was found that there was a positive association among the application of activity based costing and the competition level..
Descriptive statistics were used to implement the influence of the implementation of activity based costing in Nigeria. According to this article, the inability of traditional costing systems to provide relevant costs is a major reason on why traditional costing systems are not effective in today’s environment(Gurcanli, Bilir & Sevim, 2015). The traditional methods of costing ate not good enough to improve global competition. Activity based costing is a lot more effective when it comes to implementation . This is because there is an increasing variety of products, competition and increasing overhead costs.
This research paper illustrates the concept with the help of a Nigerian telecommunication company Helpline Telecoms Nigeria Ltd. This company previously implemented traditional costing systems which was not reflective of the actual costs that the firm incurred in the business. It is not an actual portrayal of the total costs of the firm. After the firm implemented activity based costing it is found that the cost system is more reflective of the actual costs that the firm had to incur. It is more effective because of the increased range of competition. products and increased overhead. that thiscost system will offer.It will also help the company the firm to achieve a competitive edge over its competitors that include Globacom and IHS Towers.
This particular article designates the results of a study concerning the implementation of activity based costing method in small companies that manufacture products.The possible impacts of implementing ABC at these companies are surveyed. The activity based costing implementation in small companies will differ from that of large companies. It will impact the decision making of a small company(Aldogan, Austill, & Kocaku?la?h, 2014).
Most small companies are unaware of the pros of ABC system from the viewpoint of small businesses.Such businesses cannot perform activity based costing due to reasons like non identification of improvement initiatives and information collecting regarding idle capacity costs. due to benefits of excel spreadsheet, small companies have helped small companies acquire the benefits of activity based costing inspite of not possessing the technical software. Small companies can use the analytical hierarchal process to develop cost matrices that can help develop the activity based costing system(Hardan & Shatnawi, 2013). There are also new applications of ABC in small companies. Many companies are still unaware that by adopting these cost systems they can better understand their own companies cost structure.However in order to effectively implement activity based costing system the small manufacturing companies need a more reliable and precise means of costing information. small companies are generally apprehensive of adopting activity based costing because it requires huge time and effort(Pietrzak, 2013). They worry about the fact that the benefits of implementing activity based costing systems will not outweigh the equited time and effort that the company put in(Hofmann, et al., 2013).
This paper helps illustrate the concept of small firms implementing activity based costing through the company Enviro- Log in USA. It is a company that manufactures earth friendly fire logs and fire starters. It is the largest recycler of waxed old corrugated cardboard in North America. This is a company that inspite of its small size of operations has effectively implemented activity based costing systems. Before implementing activity based costing systems , the company assigned manufacturing cots to products using an industry based costing rate based on direct labour. non manufacturing costs were assigned to products through a percentage based on total cost. It required a huge time and effort on the part of the company to implement activity based costing systems. Today effective costing systems like ABC implementation has helped this company in achieving a reliable costing structure. This has helped the company in effectively maintaining actual costs and as a consequence has increased its overall effectiveness(Godil, Hasan & Abid, 2013).
The similarities and differences which can be identified from the two journal papers can be illustrated as follows:
- Both the journal papers consider the activity based costing systems . These papers provide an adequate discussion of the benefits and the corresponding limitations of activity based costing systems. This might be applicable as a monitoring tool to manage the costs of the organisations
- Both articles consider the effective implementation of activity based costing systems and its impact in overall decision making and effective costing practices.
- Both articles highlight the usage of activity based costing as opposed to traditional costing methods
- The point of difference which can be identified from the analysis of the two papers is the scope of the paper. While the first article analyses the influence of competition on activity based costing and how activity based costing can help companies gain a competitive edge , the second article illustrates how small manufacturing companies can best effectively implement activity based costing inspite of huge time and effort it takes for the company to implement activity based costing.
- The research articles focus on companies in two different countries. While the first article focuses on a Nigerian company called Helpline Telecoms Nigeria Ltd., the second article focuses on a US company called Enviro Log in USA. The nature of two companies is different. While Helpline telecoms Nigeria Ltd is a telecommunication company, Enviro Log is a company that manufactures fire logs in USA.
- The scale of the two companies is different. While Helpline Telecoms Nigeria Ltd is a massive company having huge scale operations in USA. the company Enviro Log is a small scale manufacturing company. the practices of the business are different and therefore it can estimate that both companies apply activity based costing under different scenarios.
The analysis of the two research papers which are shown in the discussion below shows the scope of activity based costing with reference to business organisations. The outcomes can be used by management accountants in Australia are given below:
The capacity for profitability of the business is affected by the decision making and overall cost practices of the management. Both research practices have shown that the company can achieve profitability by employing activity based costing., irrespective of the size of the firm. Activity based costing can bring about improvements in business. This can happen by establishing an effective mechanism in place. The activity based costing method , if properly implemented by Australian businesses can bring about significant improvements in determining an efficient method of cost control.
Activity based costing helps in better planning and decision making of all available units. it helps the management to provide a better sense of planning control as they can use more reliable data. It allows the management to monitor targets and set them in terms of effective cost procedures. This will help Australian organisations to grow and develop and have a better planning and decision making structure in place by using activity based costing.
ABC helps in understanding the nature of behaviour of costs. It also helps in the reduction of costs in reference to activities that have no added benefit on the particular product. With the help of this management tool, the management can control fixed overhead costs. It can also exercise further control over activities that have a more straightforward influence on the cost activities of the business. this will help Australian organisations to develop a more sound cost structure in terms of its overall cost position.
ABC helps in the identification of cost drivers which help reducing costs . These can help in identifying cost drivers with a range of applications. Management accountants need to employ activity based costing in order to reduce costs by pooling the cost drivers together and foster cost reduction with the resources provided under activity based costing. The managers in Australia need to take note of this fact and undertake activity based costing to reduce costs .
Conclusion
The above discussion shows two different journal articles which emphasizes on the application of activity based costing practices in business. The above discussion shows the relevance of activity based costing in businesses as well as how it can be applicable to small businesses as well, in the manufacturing sector. It also discusses the impacts of ABC in businesses in terms of its overall decision making, profit generating ability of the business and in monitoring cost control. The practices of activity based costing can help companies achieve a better cost structure and more efficient cost control in terms of reducing overall costs and consequently improving profitability. The two companies that have been chosen per this extract have effectively implemented activity based costing and used it to achieve a sustainable outcome in business. This discussion clearly shows that activity based costing, if implemented properly can give a huge boost to business although initially it requires a huge time and effort to implement it. Thus from this analysis it is evident that all businesses can implement activity based costing considering it has the resources and tools to do so.
References:
Akinyomi, O. J. (2014). Influence of competition on Activity-based costing system implementation in Nigeria. International Journal of Information, Business and Management, 6(1), 11.
Aldogan, M., Austill, A. D., & Kocaku?la?h, M. C. (2014). The excellence of activity-based costing in cost calculation: case study of a private hospital in Turkey. Journal of Health Care Finance, 41(1).
Cannavacciuolo, L., Illario, M., Ippolito, A., & Ponsiglione, C. (2015). An activity-based costing approach for detecting inefficiencies of healthcare processes. Business Process Management Journal, 21(1), 55-79.
Carli, G., & Canavari, M. (2013). Introducing direct costing and activity based costing in a farm management system: A conceptual model. Procedia Technology, 8, 397-405.
Charaf, K., & Bescos, P. L. (2013). The role of organizational and cultural factors in the adoption of Activity-Based Costing: The case of Moroccan firms. Accounting and Management Information Systems, 12(1), 4.
Chen, A., Sabharwal, S., Akhtar, K., Makaram, N., & Gupte, C. M. (2015). Time-driven activity based costing of total knee replacement surgery at a London teaching hospital. The Knee, 22(6), 640-645.
Elhamma, A., & Zhang, Y. I. (2013). The relationship between activity based costing, business strategy and performance in Moroccan enterprises. Accounting and Management Information Systems, 12(1), 22.
Gurcanli, G. E., Bilir, S., & Sevim, M. (2015). Activity based risk assessment and safety cost estimation for residential building construction projects. Safety science, 80, 1-12.
Hofmann, A., Ozawa, S., Farrugia, A., Farmer, S. L., & Shander, A. (2013). Economic considerations on transfusion medicine and patient blood management. Best Practice & Research Clinical Anaesthesiology, 27(1), 59-68.
Kali?anin, ?., & Kneževi?, V. (2013). Activity-based costing as an information basis for an efficient strategic management process. Economic Annals, 58(197), 95-119.
Khataie, A. H., & Bulgak, A. A. (2013). A cost of quality decision support model for lean manufacturing: activity-based costing application. International Journal of Quality & Reliability Management, 30(7), 751-764.
Monroy, C. R., Nasiri, A., & Peláez, M. Á. (2014). Activity Based Costing, Time-Driven Activity Based Costing and Lean Accounting: Differences among three accounting systems’ approach to manufacturing. In Annals of Industrial Engineering 2012 (pp. 11-17). Springer, London.
Nassar, M., Aldeen Al-Khadash, H., Sangster, A., & Mah’d, O. (2013). Factors that catalyse, facilitate and motivate the decision to implement activity-based costing in Jordanian industrial companies. Journal of applied accounting research, 14(1), 18-36.
Pazarceviren, S. Y., & Celayir, D. (2014). Target costing based on the activity-based costing method and a model proposal. European Scientific Journal, ESJ, 9(10).
Pietrzak, ?. (2013). Traditional versus activity-based budgeting in non-manufacturing companies. Social Sciences, 82(4), 26-37.
Ruiz-de-Arbulo-Lopez, P., Fortuny-Santos, J., & Cuatrecasas-Arbós, L. (2013). Lean manufacturing: costing the value stream. Industrial Management & Data Systems, 113(5), 647-668.
Rundora, R., Ziemerink, T., & Oberholzer, M. (2013). Activity-based costing in small manufacturing firms: South African study. The Journal of Applied Business Research, 29(2), 485-498.
Shoaib, M., Bosch, S., Incel, O. D., Scholten, H., & Havinga, P. J. (2015). A survey of online activity recognition using mobile phones. Sensors, 15(1), 2059-2085.
Tsai, W. H., Yang, C. H., Chang, J. C., & Lee, H. L. (2014). An Activity-Based Costing decision model for life cycle assessment in green building projects. European Journal of Operational Research, 238(2), 607-619.
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