Features and Benefits of ABC Model
Discuss about the Application to Coffee Production Cost.
The objective of this recent paper is to offer a brief analysis of the activity based costing (ABC) model as well as the characteristics described from the business perspective. In attaining the objective of this report, the model is related with an ASX listed company in order to enhance the information on management accounting that is presented to the top management team. The organization that is selected in this report is National Australia Bank (NAB) that is positioned among the largest financial companies within Australia (Ahmed & Kannaiah, 2016). This will be evaluated in terms of earnings, consumers as well as market capitalization. Relied on existing corporate strategies and goals of NAB, the alignment is ensured with this model. This facilitates the bank’s top management in effective decision making. Moreover, the report focuses on recommending a management accounting tool for NAB that can support the managements’ decision making process.
ABC model can be explained as an accounting method which explains activities carried out on the company’s behalf and along with that indirect costs are associated with the products (Almeida & Cunha, 2017). In addition, the model explains interlink between costs, indirect activities along with product costs with the support of this relationship. Moreover, the indirect expenses are also associated with the products that are less compared with the conventional models related with accounting. Conversely, it also turns out to be difficult to align certain costs by means of ABC model. For example, indirect expenses like the management and office employees’ compensation that are not simple to be allocated to a particular produced well. For such reasons, the method has attained its niche within the manufacturing as well as industry sectors (Angelopoulos & Pollalis, 2017). In addition ABC accounting method is useful in target costing, profitability evaluation associated with product line, costing of products, and consumer profitability evaluation along with service pricing. ABC accounting method has attained increased popularity in every business companies as this might result in maintaining better corporate strategy and focus in a situation the costs are understood and allocated in an effective way. There are several effective features associated with ABC model that is explained under:
In ABC model the expenses are segmented into fixed as well as variable costs that are effective in providing quality information for preparing an effective cost system within a company (Arora & Raju, 2017). Moreover, the cost behavior patterns can be segmented in a better manner with proper implementation of ABC Model.
Alignment of ABC Model with NAB’s Objectives and Strategies
The cost behavior patterns in ABC costing are directly linked with diversification, cost, volume and organizational events. In addition, within ABC model there must be certain reorganization of suitable cost driver that can facilitate in explaining overhead associated with a product. Within ABC model, the cost behavior patterns are explained with the support of cost drivers in the organizations.
The concept of ABC models has been recognized in assisting with alignment with the present aim as well as strategies of the business unit. In order to align with the strategies and objectives of NAB, it is of vital importance to identify them in the beginning and hence the significance of ABC model in achieving the goal of the bank (Becker, Wald, Gessner & Gleich, 2015).
The primary mission of NAB is to provide effective resolutions to its customers after skillfully analyzing their needs. The bank considers earnings to be of vital in order sustain as well as thrive in the financial service sector in Australia. Moreover, it also focuses on the working environment so as to uplift the confidence and strengthen the morale of its employees. Hence, it is much more inclined on the way to contribute positively towards development of society and improve the quality of service provided to its customers (Öker & Ad?güzel, 2016).
NAB foresees itself to gain top position amongst the reputed bank in Australia which wants to circulate capital and money throughout the market in a smooth manner so as to meet the requirement of the customers. They have also made great investment towards development in order to entice people so as to execute its strategies in a proper manner.
The various strategies which NAB use as a tool to market its services are as follows:
- The bank focuses mainly on three kinds of services which includes credit card, business loan and home loan.
- The bank also focuses on its brand awareness to ensure growth and development so as to gain the advantage of being the first mover in the competitive market (Mahal & Hossain, 2015).
- It also tries to gain advantage by implementing certain strategies which includes lowering the interest rate on the loans and even minimizing the fess of withdrawing from ATMs so that it can maintain a competitive edge over its rivals.
- Moreover, to increase their reach, the bank also has adopted latest technologies by putting a short explanation of their services as well as products so the potential customers could learn about them easily and customer could assess their accounts in an effective manner (Onat, Anitsal & Anitsal, 2014).
- In order to entice more customers, the bank follows a new strategy where it provides credit cards to students and independently working women in very lower rates of interest.
ABC model is mainly common in the manufacturing sector but its importance also lies within the service sector (Mahal & Hossain, 2015). It has been usually observed that the financial institution has no direct costs and most of the expenses are considered within overheads. Moreover, the financial institute does not have any inventory as service cannot be stores if remained unsold; a service is consumed as soon as they are produced. Hence, the traditional method of costing does not work for a bank or other financial institutes. Hence, the need of ABC models comes in for better management of cost so as to make the decision and strategies in a better way.
Recommendation: Use of Budgetary Control as Management Accounting Tool
There are three sections in the ABC model namely activity, resource as well as cost object. In case of the mentioned bank, resource section contains the expenses that are associated with various functional units such as cost centers. This consortium of such departments is completed at branches, direct selling agents, corporate office, internet, call centers, ATM as well as other service departments such as human resource as well as IT department (Rohani, Azman & Zakaria, 2015). The cost of such departments is computed accordingly. Hence, the costs are allocated to each department as per their service volume. Therefore, it helps in enhance the cost allocation among the department in future.
The activities section of NAB includes the transactions that are performed by its customers through various channels. Receiving the application, then interviewing as well as viewing the credit history of the applicant. Then the process of evaluation of the same is focused to take the decision of loan transfer. Finally, the disbursement of the loan to the applicant could be counted with the activity section as all of these are processed within the bank. After the same, each and every activity are placed with its name and time mentioned. The batch size is need to e considered as the activities were needed to be taken in batch mode and hence through the ABC model, the activities performed by each department will be grouped in accordance (Zhuang & Chang, 2017). As a result of the same, the bank could reduce the ATM fee for the customers while the same could be done for the loans as well. This might also lower the cost of adopting latest technologies to enhance the customer support system.
Eventually the cost object section, it can be distinguished in two parts. The primary section calculates the various transactional costs which have been performed by the customers using various products through usage of diverse distribution channels. This may even include the withdrawal of cash using ATM from the saving account. In this case, the cash could be withdrawal from either savings account or from current account which might have similar effect for NAB but the bank would need to compute the cost in separate ways. Hence, ABC models could be helpful for identification of cost and the bank could also follow which accounts are being followed and accordingly the cost could be allocated to those objects. In such ways the bank could be able to increase the awareness of its brand and even sustain successfully in the competitive market of Australian banking industry through increasing the competitive advantage. This may also help the bank to identify the preference of the customers regarding their cash withdrawal habits and then accordingly the bank may be able to provide them credit cards at low rate of interest.
For proper implementation of ABC model within the NAB, it is deemed important for the upper management to offer required support (Cyplik & Uberman, 2017). In addition, the design and implementation of ABC model needs to maintain the responsibility within the cross functional team rather than the accounting department. The banks are necessitated to maintain a team that will include representatives from all the departments for employing the data that is gathered from the ABC model. This will include representatives from distinct departments of the National Australian Bank that includes engineering, marketing; accounting employees as well as upper management those attain technical capabilities. The company is required to employ an external consultant having exceptional skills on ABC model and can offer relevant advice to the team.
The upper level management of NAB requires help in ABC model implementation within the companies because of several reasons (Jiménez & Afonso, 2016). One of these reasons includes absence in leadership from higher-level management that makes the managers of the World Bank to turn out to be resistant towards the cage within the organization. Another reason indicates that in case the upper management of NAB dies not support systems of ABC model then they can perceive that the model is not that significant and can further reject the model. For successful designing and implementation of ABC costing system for suitable cost allocation, it is important that the NAB management must understand the recent cost accounting system of the bank. Moreover, the cross-functional teams require being involved within the ABC model implementation in maintaining suitable cost allocation within all the departments of the company. Considering the same, this might facilitate the bank in employing the tool for external financial reports of the company.
Budgetary control can be explained as an effective management accounting tool in NAB as the budgets have considerable function in controlling and planning. Moreover, the managers employ them for monitoring, controlling and planning distinct activities within the organizational level (Cugueró-Escofet & Fito, 2016). There are several advantages associated with NAB that can be attained through budgetary control implementation are explained under:
The managers within NAB can link the efforts of the employs working in the bank towards attainment of a common goal. Budgetary control can facilitate in synchronizing the activities of bank. The bank might also support in coordinating several efforts in attainment of the predefined objectives. In case the managers of NAB recognize that the expenses related with the specific department are higher in comparison to the anticipated budget, it will require a special management attention as well as action (Geiszler, Baker & Lippitt, 2017).
Maintenance of effective budgetary control can support NAB in attaining relevant knowledge on the previous experience. In addition, through critically analyzing the success and failure of previous budgets, minimization of the related errors can be maintained along with evaluating the reasons associated with such performance. Considering the same, the management of NAB focuses on developing processes so that occurrence of such errors does not take place in the upcoming years.
Conclusion
The objective of this recent paper is to offer a brief analysis of the activity based costing (ABC) model as well as the characteristics described from the business perspective. In attaining the objective of this report, the model is related with an ASX listed company in order to enhance the information on management accounting that is presented to the top management team. It can be gathered from the paper that in ABC model the expenses are segmented into fixed as well as variable costs that is effective in providing quality information for preparing an effective cost system within a company. Moreover, the cost behavior patterns can be segmented in a better manner with proper implementation of ABC Model.
References
Ahmed, R., & Kannaiah, D. (2016). The considerations for the implementation of an Activity Based Costing System (ABC).
Almeida, A., & Cunha, J. (2017). The implementation of an Activity-Based Costing (ABC) system in a manufacturing company. Procedia Manufacturing, 13, 932-939.
Angelopoulos, M., & Pollalis, Y. (2017). Using ABC costing method with in a KPI-based framework to a Lean transformation of a Greek Public Company.
Arora, A. K., & Raju, M. S. S. (2017). The Effect of Firm’s Size on the Adoption and Implementation of Activity Based Costing. Splint International Journal of Professionals, 4(7), 36-40.
Becker, S. D., Wald, A., Gessner, C., & Gleich, R. (2015). The Role of Perceived Attributes for the Diffusion of Innovations in Cost Accounting: The Case of Activity-Based Costing. Comptabilité-Contrôle-Audit, 21(1), 105-137.
Cugueró-Escofet, N., & Fito, M. (2016). The Impact of ABC Costing Systems to Solve Managerial Cost Problems: A Real Improvement, a Fad or a Fashion?.
Cyplik, P., & Uberman, R. (2017). Activity Based Costing As A Tool For Effective Use Of Outsourcing In Supply Chain Management–Case Study. Business Logistics in Modern Management.
Cyplik, P., & Uberman, R. (2017). Activity Based Costing As A Tool For Effective Use Of Outsourcing In Supply Chain Management–Case Study. Business Logistics in Modern Management.
Geiszler, M., Baker, K., & Lippitt, J. (2017). Variable Activity?Based Costing and Decision Making. Journal of Corporate Accounting & Finance, 28(5), 45-52.
Jiménez, V., & Afonso, P. (2016, December). Risk assessment in costing systems using costing at risk (CaR): An application to the Coffee production cost. In Industrial Engineering and Engineering Management (IEEM), 2016 IEEE International Conference on (pp. 1315-1319). IEEE.
Mahal, I., & Hossain, A. (2015). Activity-Based Costing (ABC)–An Effective Tool for Better Management. Research Journal of Finance and Accounting, 6(4), 66-74.
Öker, F., & Ad?güzel, H. (2016). Time?driven activity?based costing: An implementation in a manufacturing company. Journal of Corporate Accounting & Finance, 27(3), 39-56.
Onat, O. K., Anitsal, I., & Anitsal, M. M. (2014). Activity based costing in services industry: A conceptual framework for entrepreneurs. The Entrepreneurial Executive, 19, 149.
Oseifuah, E. K. (2018). Activity based costing (ABC) in the public sector: benefits and challenges. Management, 12, 4-2.
Rohani, J. M., Azman, N. A., & Zakaria, M. H. (2015). DEVELOPMENT OF ACTIVITY-BASED COSTING IN FABRICATION COMPANY: A CASE STUDY. Jurnal Mekanikal, 38, 44-52.
Zhuang, Z. Y., & Chang, S. C. (2017). Deciding product mix based on time-driven activity-based costing by mixed integer programming. Journal of Intelligent Manufacturing, 28(4), 959-974.
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