Explanation of the Activity-based Costing and its features
Discuss about the Exploration of factors influencing on choice.
The environment around Alumina Limited changes continuously. This era of worldwide competition, surfacing technologies environment, customers of the Company are demanding aggressive pricing, superior quality services/products and lower pricing (Datta, Mahapatra, Banerjee and Bandyopadhyay 2010). These changes have to influence managers who must look for new strategies, complex cost management, and re-organization innovation or techniques to establish profit growth, and continue improvements. With this increasing changes in the business environment, the best costing method that can help solve organization problem is the ABC model (Ahamadzadeh, Etemadi and Pifeh 2011). The main purpose of the report is to discuss the application of Activity-based costing in the Organization. Alumina Limited is one of the major Australian Organization listed on the ASX. The specific focus of the Company is to provide feedstock for all the aluminum smelting. Alumina limited should employ the use of the ABC system because it is the most attractive substitute for conservative costing systems. The development of the model into the organization will improve essential accounting areas of control, decision making, and performance measurement. The report is separated into parts which provide additional information on core importance of the Activity-based model in the organization. The report also explains the Activity-based model and its features. The next part discusses the recommendations that should be put in place to facilitate the implementation of the Model.
ABC system is a technique of the managerial accounting that traces costs of overhead to activities as well as apportioning them to objects. Activity-based costing that helps in identifying production processes, or activities, that in turn help in processing jobs. These activities are combined with similar processes that are linked to activity cost driver (Bodnar and Hopwood 2012). The apportioning of indirect costs is enormously essential for all the management, especially those that are outsourcing or downsizing. Profitable departments within the organization can be apportioned too much of the indirect cost making them look like unprofitable (Ismail 2010).
The main features of the Activity-based costing include: the pattern of the cost behavior are diversity-related, volume related, time-related and events related, it require identification of the cost driver for tracing the overhead to a product, cost driver order cost behavior pattern and the total cost is made up of two components. They include variable cost and fixed cost which is required for the provision of quality information to create appropriate costs system in the organization (Dejnega 2011).
Explanation of how the ABC aligns with strategies and goals of the organization
Alumina Limited Company is made up of three core areas of mission statement: the first part is that the Company helps in shaping the future by delivering aluminum of high performance to their customers, for use in different ways. The Company also functions with the deep commitment to well-being and sustainability as well as developing their people. Lastly, the Company is focused on performance, innovation, and profitability, as well as assisting wider aluminum cluster; this will ensure that the contribution of the firm to the global economies and UAE is long lasting (Teunter, Babai and Syntetos 2010).
The main objectives of the Alumina limited include the following:
Alumina limited company ensure AWAC business values is reflected in their share prices and understood by the market in which it operates in. It also maintains the position of the AWAC as the leader of the market. It pays considerable dividends to shareholders.
The Company has the responsibility of investing in alumina refining processes and bauxite mining through the ownership of AWAC. Through a good understanding of the market, the Company can effectively contribute to AWAC joint venture as well as manage its competitors in the industry. The main key part of the Alumina Limited strategy is the ability of the organization to protect the value of their joint venture interest. For the past few years, AWAC has been having a strategy of ensuring that other refineries in the industry are cash positive in the life cycle (Basili et al. 2010). The Company also had the strategy of tier one assets in the industry. The Alumina Limited has managed to tier one asset especially I the Range up, Pinjarra, Ma’aden and Saa Luis refineries and their related mines.
ABC can help Alumina Limited to improve their competitiveness by enhancing managerial decision-making process. The key ideas of Activity-based Costing are the production of services or products and create activities which use resources. Costs of resources can be easily traced to different services/products based on different activities (Ayvaz and Pehlivanl 2011). The Alumina Limited can use the model in providing accurate, timely and accessible and understandable information on cost and solution that help solve the problems of the traditional costing system. The successful implementation of the ABC system will enable the organization to improve the management valuation as well as increasing the value of the firm (Hadi and Mohamadghasemi 2011). The model will also help the firm to come up with the best product costs, and this will enhance the profitability of the organization. Activity-based costing will enable the organization to apportions to activities and assigns a cost to services/products based on the use of each service/products of these activities. The model is made up of four components which stimulate the growth of the organization. The four components include cost drivers fitness, cost information credibility, the accuracy of cost calculation, as well as cost reporting usefulness can be used in improving the performance of the organization (Vinodh and Kumar 2011).
Explanation of how the Activity-based costing can assist the Alumina Company in achieving its strategies
Cost drivers fitness is the factors used to apportion costs of action to services/products, which associate activities, easily measurements, resources consumption and ease of actual practice. The main objective of Activity-based costing is to offers managers with accurate cost information by use of cost drivers to apportion activity costs services and produces. The cost drivers will also analyze the indirect costs to find out the activities that link those costs to various activities. The cost drivers will enable the Alumina limited Company to achieve the full benefits of the Activity-based costing (Hoozée and Bruggeman 2010).
Cost calculation Accuracy is the ability of the organization apportions indirect costs of services/products based on the activities which the organizations are performing. It will use different cost drivers. Activity-based costing will emphasize the determination of costs by connecting expenditure to various activities. Application of multiple cost drivers for cost calculation will reduce the risks that are associated with the distortion and offers accurate calculation. The accuracy of costing will helps managers to understand how the resources of the Company are being to add value to the management with the intention of improving strategic outcomes of the Organization. This will enable the firm to be attractive in the competitive environments within the industry (Chiarini 2012).
Cost information credibility is the valuation of cost information attributed to relevance, accuracy, frequency, reliability, thoroughness, and understanding for decision making in Alumina Limited. Cost information credibility assists managers to ascertain opportunities and potential problems in time as well as making effective and informed decisions (Dalci, Tanis, and Kosan, 2010). The credibility of cost information enables managers to oversee business process and activities of the organization.
Cost reporting usefulness is the actual use of cost information for planning, decision making and controlling to improve the performance of the job in the organization. Cost reporting enables the Alumina Limited to improve and evaluate job performance, enhanced decision-making process and provides the good understanding of the business processes. The cost reporting enables the Company to enhance and promote a good understanding of the activities to improve the performance of the organization. It will also enable the organization to monitor the activities of the Company (Cardos and Pete 2011).
Training requirements- It is important to provide workshop session and training to all the senior managers and employees respectively. The training will offer the management’s added advantage because they will understand how the model works in the organization. The skills and knowledge gained by the employees after the training process will improve the performance of the organization. The management will also acquire instruction on how to assign costs by use of the model. The investments in training will add value to the employees thereby creating supportive workplace and improved morale and satisfaction of the employees. It will also tackle the weaknesses of the employees that can prevent them from using the Model to improve the performance of the organization.
Assess and identify the need of the Activity-based costing- the assessment and identification of the factors that affect the performance is essential because it will enable the management to concentrate on the negative factors with the aim of reducing the weaknesses of the model to the performance of the organization. Understanding what the model requires will enable the organization to effectively develop the Activity-based costing system according to the well-planned standard (Chea 2011).
The best alternative model that will be suitable for the Alumina Limited is the TDABC Time Driven Activity Based Costing. This is because the new model will help in solving the problems of the ABC System. Instead of measuring the time taken by the employees to perform the specific duty, Managers will have to approximate capacity of the supplied resources (Dalci, Tanis and Kosan 2010). TDABC will provide additional information on how the management can improve its performance by concentrating on the issues that affect the performance of the Alumina Limited.
Conclusion
The report attempt to explain the importance of the Activity Based Costing and the functions it performs in improving the performance of the organization. The paper also evaluates how the Alumina Limited Company can evaluate its performance using the ABC model. The main features of the ABC system are also explained from the paper. The report also gave the Board the best alternative management tools that can be used together with the Activity Based Costing to improve the performance of the organization. The implementation of the ABC system into the organization will require the management to give training to all the employees and to the management itself (Datta, Mahapatra, Banerje and Bandyopadhyay 2010).
References
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Bodnar, G.H. and Hopwood, W.S., 2012. Accounting information systems. Pearson Higher Ed.
Cardos, I.R. and Pete, S., 2011. Activity-based Costing (ABC) and Activity-based Management (ABM) Implementation–Is This the Solution for Organizations to Gain Profitability?. Romanian Journal of Economics, 32(1), p.41.
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Dalci, I., Tanis, V. and Kosan, L., 2010. Customer profitability analysis with time-driven activity-based costing: a case study in a hotel. International Journal of contemporary hospitality Management, 22(5), pp.609-637.
Datta, S., Mahapatra, S.S., Banerjee, S. and Bandyopadhyay, A., 2010. Comparative study on application of utility concept and VIKOR method for vendor selection.
Dejnega, O., 2011. Method Time Driven Activity Based Costing. Journal of Applied.
Hadi-Vencheh, A. and Mohamadghasemi, A., 2011. A fuzzy AHP-DEA approach for multiple criteria ABC inventory classification. Expert Systems with Applications, 38(4), pp.3346-3352.
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Ismail, N.A., 2010. Activity-based management system implementation in higher education institution: Benefits and challenges. Campus-Wide Information Systems, 27(1), pp.40-52.
Teunter, R.H., Babai, M.Z. and Syntetos, A.A., 2010. ABC classification: service levels and inventory costs. Production and Operations Management, 19(3), pp.343-352.
Vaughn, P., Raab, C. and Nelson, K.B., 2010. The application of activity-based costing to a support kitchen in a Las Vegas casino. International Journal of Contemporary Hospitality Management, 22(7), pp.1033-1047.
Vinodh, S. and Kumar Chintha, S., 2011. Application of fuzzy QFD for enabling leanness in a manufacturing organisation. International Journal of Production Research, 49(6), pp.1627-1644.
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