Adopting Activity Based Accounting For Balverk Company

Conventional vs Activity Based Accounting

Question:

Discuss about the Performance Measurement and Control Systems.

In the modern world, the companies that operate in the economy try to increase their profit by undertaking various strategies. The management of accounting is an important function of an organization as maintenance of accounts is useful for the recording of the transaction and understanding the profit that is gained by the organizations. The process of accounting consists of two methods namely Traditional Accounting, which is even known as the Conventional Method and Activity Based Accounting. In the process of conventional method all the expenses gets assigned equally irrespective of the department contribution in that particular department. On the other hand incase of ABC costing all the expenses get allocated in the ratio in which a particular department has contributed.

The paper tries to analyze the accounting and the production process of Bakverk Company who manufactures a variety of pastries. Initially the company had only three lines of products and it is seen that the company produced huge volume of each product by making use of hard work by the labor and the easy and simple machines. It is seen that the company primarily sells their original line of products and it is seen that the current scenario, the company even manufactures low variety of pastries and it is seen that the production of these pastries become costly as it requires to the use of additional machineries and handling of materials.

The company has undergone a huge change in the business strategies and it is seen that the performance of the organization has increased as stress has been given on the quality and the delivery of the performance. However, the profit of the company has been decreasing at a fast rate and therefore, it is seen that the management are under the consideration of transforming their conventional method and adopting ABC costing method so that profit of the organization can increase. Therefore, in this paper the use and advantages of ABC Costing will be analyzed and then the analysis of the income and expenses of the firm will be discussed.

The ABC Costing method is used because of its rational process to apply within the industry. The use of ABC Costing is significant as the traditional method assigns the costs equally regardless of the contribution of each department whereas ABC method does not do the same.  ABC method is more precise because this process does not allocate the overheads equally but assigns the cost to the department who contributes to the product line. Therefore, it is seen that this process helps in proper allocation of the costs and thereby reduces the challenges of the firm.

It is seen that Balverk Company makes use of simple machineries for the production of three product lines of pastries. The use of ABC method will help the management to understand the departments that contribute to the manufacturing of the product and therefore, the operational cost of the organization can be managed properly. ABC method will even minimize the struggle of the firm and it will be seen that organizational changes and the profit of the firm wil go hand in hand.

Advantages of Activity Based Accounting

The process of ABC utilizes the base of cost allocation to assign the overheads.  The various steps undertaken for the usage of ABC is discussed below:

Initially the product is selected on which the overhead cost requires to be assigned.

The next step involves the recognition of the direct costs that requires to be assigned on the product that has been chosen earlier. It is seen that this is one of the complex steps that is to be implemented while making use of ABC method as it is necessary to recognize the direct costs that are associated with the production of a commodity.

In this step, the selection of the actions are chosen over which the overhead costs are assigned evenly. This is step is even a difficult one as the firm requires to construct the cost pools based on the direct cost that are related to the services and the products.

In this step, the computation of the rate per unit of the cost allocation base is exploited to assign the indirect costs that are related to the product. In this step, it is essential to compute the rate per unit. It is seen that in this step it is essential to segment the cost allocation base with the recognized drivers of cost. The use of this step is helpful for the calculation of the per unit rate that will be used to understand the percentage of cost that is allocated to every step of the manufacturing process.

The last step involves the formulation of the report. The results that are gained from the process of ABC is converted into several reports and statements as wished by the management. For instance, if the management wants to have knowledge about the cost of a machine with respect to a specific product or the total cost that is suffered in a specific commodity so that various types of reports can be constructed.

The case study of Balverk Company reveals that there are 6 schedules that are related to the performance of the data and every schedule will be discussed separately.

The analysis of schedule 1 reveals that there are 8 activity centers and everyone of them has costs related to them. The use of ABC method allocates the cost individually in all the activity centers with respect to the building cost, wages, depreciation, consumables, energy and other. The total value that is seen with respect to the new product development accounts to $112, 159.4595. The next activity center is the sales dispatch and the total amount of cost allocated to it is $375,959.4595. The inspecting center of the firm is an important department and the value comes to $ 84,000. The mixing and the filling of the raw materials for the production of pastries associate to $, 232,654.0541 and $1,321,116.2162. The baking and packing of the pastries involve an amount accounting to $874,154.0541 and $378,837.8373 respectively. The administration and the corporate management has a total amount of $ 314,218.9189 and $ 0 respectively.

ABC Costing Method and Balverk Company

The space and the labor associated with the function of mixing involves set-up mixer that occupies 5% of the space and 10% of labor. The load mixes involves 10% of labor time and 5% of the floor space. The operate mixer 40% of the labor time and 70% of the floor space revealing that this process is a crucial process and involves extensive labor time and machinery. The unload mixer takes 20% of the labor time and 5% of the floor space. The clean mixer takes 10% of the labor time and 5% of the floor space. The filling room mover takes 10% of the labor time and 10% of the floor space. Therefore it can be said that the activities that are crucial takes more labor time and floor space of the firm.

This schedule reveals the total number of labor used in each activity of mixing and the total number of labors associated with this activity is 8400. It is seen that 10% of the labor is used by the set up mixer, the load mixer uses 10% while the operate mixer utilizes 40% of the labor. 20% of the labor is taken by the unload mixer and 10% each is taken by the clean mixer and the filling room.

This schedule reveals that the use of ABC method has been influential for the proper allocation of the quantity that has been consumed by the driver and the activities with respect to Custard Tart. It is seen that the annual volume amounts to 14000. The proper distribution of the cost and the quantity on each activity is helpful for the management to understand the activities with ease so that the performance of the organization gets improved.

This schedule reveals the distribution of quantity and the cost assigned to various drivers regarding the production of apple tart and it is seen that the company concentrates on the custard tart more than the apple pies. Therefore, it is seen that there might a need for the firm to balance their production process so that the operations of the firm improve thereby increasing the profit of the firm.

Conclusion

The analysis of the paper and the data that have been gathered for Bakvert Company reveals that it is necessary to make use of ABC method so that the management gains knowledge about the percentage of contribution by each department and the cost associated to it so that they can stabilize their operation and improve their profit and market share.

Dong, J., Liu, C. and Lin, Z., 2014. Charging infrastructure planning for promoting battery electric vehicles: An activity-based approach using multiday travel data. Transportation Research Part C: Emerging Technologies, 38, pp.44-55.

Frazier, W.E., 2014. Metal additive manufacturing: a review. Journal of Materials Engineering and Performance, 23(6), pp.1917-1928.

Kaplan, R. and Anderson, S.R., 2013. Time-driven activity-based costing: a simpler and more powerful path to higher profits. Harvard business press.

Simons, R., 2013. Performance Measurement and Control Systems for Implementing Strategy Text and Cases: Pearson New International Edition. Pearson Higher Ed.

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