Activity Based Costing Model and its features
Discuss about the Developing Countries Set Better Packages Rates.
The purpose of the cost and management accounting system is allocate the different cost between costs of goods sold and inventories in order to find the profit for internal and external reporting. It also provides the relevant information to help the managers to take relevant decisions and provides information to plan, control, and to measure performance. Management accounting is essentially based on the principle that all production costs are absorbed in the cost object. There are mainly two types of cost: direct cost and indirect cost. Direct cost is easily traceable and can be directly allocated to the cost object while indirect cost is not easily traceable and these costs are allocated on the basis of understanding of cost accounting system. Prior to activity based costing, costs are allocated using the traditional costing system. Traditional costing system uses only one overhead rate to allocate the indirect cost while activity based costing allocates the indirect costs on the basis it is consumed in each production activity (Wagener, 2008).
In this report there will critical discussion of activity based costing model and its features. On the basis of the critical discussion there will be discussion that how ABC model apply to the chosen company. In this explanation detailed overview of the company will be provided and how ABC model helps company to achieve their strategies. Recommendation will be given to implement the ABC model in the chosen company. Apart from the ABC Costing model, another management accounting tool has been suggested that is relevant to the chosen company.
The ABC Costing model is widely used management tool in manufacturing and service industry. It became famous due to its unique feature of allocating the indirect costs to the cost object as it was used in each activity undertaken in the organization. Basically ABC costing model is the two stage procedure that is applied to assign the overhead costs to the products. At the first stage all the significant activities are identified that occurs during the production of each product. Overhead costs are assigned to each activity on the basis of the resources consumed by each activity. At stage two, activity cost pool statement is prepared to assign the overhead cost to each activity and to find out the cost driver of each cost pool. On the basis of the overhead rate identified in the cost pool, overhead costs are allocated from each activity cost pool to each product. The overhead costs are proportioned to each product line according to the amount of the cost driver consumed by each product line (Blokdyk, 2017).
Some of the important features of the ABC costing system
There are benefits of using the ABC Model to allocate the overhead cost to each activity as it help in effective decision making, which was not possible under traditional costing model. The traditional costing model leads to wrong decisions that impact the profitability of the company and also leads to losses in some of products line due to wrong distribution of cost to the cost object. ABC cost model on the other hand provide accurate and detailed information of production costs that helps to get rid of distortions of the cost allocation in traditional costing method. Through use ABC costing method one can identify the activity that is responsible for increasing in cost of product and also check profitability of each product more accurately. The application of ABC cost analysis improves the operations and also increases the profitability of the company. ABC costing helps to identify the non value activities and also provides way to eliminate these activities. There are certain limitations associated with the implementation of the ABC costing as it required detailed study and cost consumption before making it fully workable in management accounting system. In order to implement the new management accounting system it is essential to test the link between the cost and benefits of adapting the system so to find out the usefulness of new system over the old system (Shapiro, 2018).
- ABC costing divided the total cost into fixed and variable cost because such information is necessary to design the best cost system for both service and manufacturing organization
- Under this system proper distinction is made between the cost behaviour patterns. The different cost patterns used by the ABC costing model to allocate the cost are related to the volume, diversity, events and time.
- This method uses cost drivers to allocate the cost overhead to different product as it provide reasonable allocation of all indirect cost
- Cost driver chosen reflects the cost behaviour pattern applied in the business (Wiese, 2009)
An Identification of Mission & Objectives of CSL Limited
CSL Limited is a recognized global biotechnology company involved in carrying out research, development, manufacturing and marketing of products for treatment and prevention of serious medical diseases and conditions. The company is listed on ASX and is headquartered in Melbourne, Australia. The company mainly provides its biopharmaceutical products in Australia, the US and the UK, Germany, Switzerland and other regions of the world. It carries out its business operations with the two main segments, CSL Behring and Seqirus. The major product areas of the company includes development and distribution of blood plasma derivatives, vaccines, anti-venom and cell culture reagents used in treatment of various medical and genetic conditions.
The company is highly committed to promote the health and well-being of people by providing them innovative and higher quality drugs. It aims at developing and delivering innovative biotherapies and influenza vaccines for saving lives of people from various life-threatening medical conditions. The company passion is to improve the quality of life of large number of patients by saving them from various life threatening conditions. The strong values and principles of the company are fundamental to its long-term success. As such, the company mission is recognized as discovering, developing and delivering innovative medical therapies for the betterment of patients. The company for achieving its mission places special emphasis on developing a competent team of scientists and researchers for manufacturing of medicines for helping millions of patients across the world. The objectives of the company is to remain patient-focused and development of innovative solutions to wide range of rare and serious diseases of the patients for securing their well-being (CSL Limited, 2018).
Aligning of the ABC Model with the Current Goals and Strategies
The company’s long-term strategy is to become a global leader in development of rare biopharmaceutical products for treatment of patients fighting from rare and serious diseases. For achieving this strategy, the company is making continuous progress on becoming fastest growing protein based technology businesses and a leading provider of vaccines products. The strategy is realized by development and manufacturing of life-saving therapies by placing high focus on product safety and quality (CSL Limited, 2018).
The company involved in development of innovative medical products and services has to incur large-scale research and development investment for the use of modern medical techniques and processes for researching and development of improved and better biopharmaceutical products for the patients. As such, the company needs the implementation of an efficient system of costing for covering expensive healthcare service costs. This is because the traditional method of costing such as absorption costing is less accurate for identification of overhead cost related with manufacturing of products. The traditional method of costing does not prove to be effective in development of specific actions for control of deviations in context of particular costing problems. Thus, the use of ABC costing method by CSL Limited will prove to be largely effective in gaining more detailed information related with cost activities of the hospital and thus development of efficient methods for cost control (Michela and Lapsley, 2005).
CSL Limited strategic priority is to become a global leader in development and delivering of rare biopharmaceutical products such as vaccines for prevention of people from life-threatening diseases. Therefore, the R&D activities of the company are highly complex and require the use of an efficient costing system for identification of expenses incurred in each activity for proper allocation of R&D expenditure by the financial manager. This will help in improving the quality and controlling costs and assessing the overall expenses that the company will incur in delivering its products and services to the target consumers. The departmental structure used in traditional method of costing does not seem to be apt as per the corporate strategy of CSL Limited. This is because it is not suitable for accurately reflecting the cost involved in different type of activities involved in offering the required products and services to the patients. ABC costing method is highly efficient in developing a relation between cost of patient care and the patient outcomes. It will accurately help in identifying of wasteful activities and thus improving the operational efficiency by aligning the strategic priorities of the company with its overall mission and goals (Popesko and Novak, 2014).
Identification of the Corporate Strategies of CSL Limited
The analysis of the overall cost incurred by the company on the basis of patient level will help in providing an accurate measurement of the operational cost and facilitating the managers to develop a n adequate understanding of the actual cost of health care. It will help the company to realize its corporate strategies by implementation of adequate control measures that will facilitate in achieving its long-term goals and objectives. This can be achieved largely by the use of ABC costing method by identification of the correlation between a specific R& D activity and the resources required for carrying out it and thus determining accurately the resources cost (Zhu and Lin, 2012).
CSL Limited is recommended to implement the model of ABC costing by use of following tools as follows:
- Cost Driver Analysis: The method adopts the use of identifying the causes of overhead for allocating the overhead cost as per the number of units of produced manufactured by the company. This requires the company to gain an adequate understanding of the major cost drivers of clinical research that can be categorized on the basis of clinical procedures costs, administrative staff costs and the site monitoring costs. This is essential for improving the efficiency of clinical trial and reduction of significant costs (Kinney and Raiborn, 2012).
- Activity Analysis: This method involves the use of following steps that are, gaining an analysis of overall activities required in delivering products to the patients, gathering of cost data. Aligning the cost as per each activity, development of output metrics and carrying out overall analysis of cost. It will prove to be largely helpful in assigning the indirect costs to the number of products manufactured by the company (Haider and Asif, 2012).
The management accounting tool other ABC costing model that can be used in the health care industry and which is suitable for the CSL Limited is Top Down cost allocation approach. This method is also known as macro costing, gross costing or average costing. This cost allocation approach uses information such as current utilization and actual expenses to find out the direct and indirect cost. Than these cost are allocated to various specialties and services areas so that no expenses is left to be allocated to cost center. This method is most suitable in health care industry as it allocate the overall cost expenses in meaningful manner as compare to traditional costing approach (Baveja and Kipp, 2014).
Conclusion
ABC costing model has been considered as the alternative approach to the traditional costing model because it takes into all the limitations of the traditional costing system and provide a new approach to allocate the cost to the cost object. Apart from ABC costing model, top down model has been suggested as it helps to allocate the cost in proper manner in health care industry.
References
Baveja, L. and Kipp, R. 2014. Top down cost allocation can help the universal health care schemes in developing countries set better packages rates. [Online]. Available on: https://in.milliman.com/uploadedFiles/insight/2014/universal-healthcare-schemes.pdf [Accessed on: 17 May, 2018].
Blokdyk, G. 2017. Activity-based Costing ABC: Beyond the Basics. CreateSpace Independent Publishing Platform.
CSL Limited. 2018. [Online]. Available at: https://www.csl.com/ [Accessed on: 17 May 2018].
Haider, A. and Asif, E. 2012. Quality Operations Procedures for Pharmaceutical, API, and Biotechnology. CRC Press.
Kinney, M. and Raiborn, C. 2012. Cost Accounting: Foundations and Evolutions. Cengage Learning.
Michela, A. and Lapsley, I. 2005. Activity Based Costing In Healthcare: A UK Case Study. Research In Healthcare Financial Management 10(1), pp.61-75.
Popesko, B. and Novak, P. 2014. Application of ABC Method in Hospital Management. Recent Researches in Economics and Management Transformation.
Shapiro, J.F. 2018. On the Connections Between Activity Based Costing Models and Optimization Models for Decision Support (Classic Reprint). Fb&c Limited.
Wagener, D. 2008. Activity-Based costing and its later development into activity based budgeting and management. GRIN Verlag.
Wiese, N. 2009. Activity-Based-Costing (ABC). GRIN Verlag.
Zhu, F. and Lin, M. 2012. Test and Optimization of ABC-System. Proceedings of 2012 International Conference on Mechanical Engineering and Material Science.
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