What is Activity-Based Costing (ABC)
Management accounting entails the practice of preparing the management explanations and reporting which in turn offers well-timed and precise arithmetical and financial evidence need by the executive in making short-term and long-term decisions (Al-Qudah & Al-Hroot 2017). In management accounting, the manager utilize provisions of the accounting information to better get informed before making decision on the matters within the firm, which in turn assist them in running and managing the functions (Sarokolaei, Ebrati, Khanghah & Ebrati 2012). In other words, management accounting is the professional that comprises of partnering in performance management systems, management decision-making, provision of expertise in the financial control and report and devising performance and planning management systems to help the organization’s management in formulating and implementing organization’s strategy (Al-Qudah & Al-Hroot 2017). It is the strategy of analysing organization’s financial information advising on the business strategy and bringing about sustainable business success (Zaman 2009). There are a number of topics associated with management accounting, some of which include budgeting, activity-based costing as well as standard costing. The paper would be assessing one of the topic; that is, activity-based costing. This would be based on two research-based articles linked to the topic after which the paper provides explanation of the topic. This would be followed by explanation of purpose of the two articles and the research questions set out. Further, the paper would present a discussion of the differences and similarities in findings of these two articles and is then wrapped by discussion of four specific lessons learned and outcomes from the articles that would be important for management accountants operating organizations in Australian.
The ABC was clearly established in the year 1987 by Kaplan and Bruns. It was designed with the aim of assigning costs to their activity levels which in turn enable more accuracy in cost information (Elhamma & Zhang 2013). In essence, activity-based costing is considered as the process where costs are mostly assigned doe to cause-and-effect association between the costs and activity levels which drove such costs (Sarokolaei, Ebrati, Khanghah & Ebrati 2012). In other words, ABC is described as the approach of charging the outlays to their cost units on paybacks received from this explicit unplanned doings (Maiyaki 2011).
It is a technique of measuring performance and costs of cost objects and activities (Vieira & Hoskin 2005). Hence, it assigns the costs to the relevant activities based on usage of the possessions and allots the costs to the substances on activity usage (Zaman 2009). Moreover, ABC is a full absorption costing technique that gain relatively more ground than the conventional approaches as a result of more correct cost evaluation and superb tracing of costs (Elhamma & Zhang 2013). It is also described as the costing systems which permit firms in tracking costs linked with the relevant activities to deliver services or produce products. It measures activity and process performance, determines the cost of process outputs, process effectiveness and efficiency (Vieira & Hoskin 2005). It is an approach to quantitatively measure of relevant costs as well as performance of the activities, cost objects and resources including overhead costs (Al-Qudah & Al-Hroot 2017). It captures costs for aspects of production, as well as administrative expenditures, and utilizes them to a more distinct activity arrangement (Maiyaki 2011).
Role of ABC in Management Accounting
ABC play a significant role in organization’s management productivity in that is assist the management in determining whether the firm is progressing well (Rbaba’h 2013). Besides, ABC offers relevant information on how efficiently and effectively the firm manages most of its resources. With the ABC, an entity or a firm could easily estimate cost components of the whole products and its services (Sarokolaei et al. 2012). This could assists in informing the organization’s decision to relevant stakeholders. It also helps in identifying and eliminating the services and products that are unprofitable and lowers prices of the products that are overpriced. Besides, the ABC helps in identifying and eliminating services and production processes which are ineffective and allocating processing concepts which result in similar product at better yield (Vieira & Hoskin 2005).
Basically, in organization operations, the ABC usually assigns the firm’s resource costs vial activities to service and products provided to the customers (Oseifuah 2018). This system has revolutionized the costing systems. In essence, ABC is the management accounting approach of analysing business operations which results in cost identification as well as cost classifications on the basis of activities (Vieira & Hoskin 2005). ABC is viewed as the management accounting approach to resolve issues of the traditional costing systems; that is, where the TCA was unable to pin point true costs of the production processes (Pokorná 2016). It is also defined as the approach of monitoring and costing of the activities that entails tracing the resource intake and then costing the final yield. Here, all resources are usually allotted to relevant deeds and these activities to the cost substances on the basis of usage approximations (Rbaba’h 2013).
The system is also used as the tool for understanding the customer and product cost and the profitability of the products based on performance and product processes (Zaman 2009). As such, this system has been predominantly used in supporting the strategic decisions like outsourcing, measurement of the process improvement, pricing and identification initiatives. Implementing the AC reduces costs incurred and improves resource allocation processes. This might leads to improvement of resource allocations in line with the budget surplus and strategic objectives (Sarokolaei, Ebrati, Khanghah & Ebrati 2012).
Activity-based costing has fundamental features in seeking to lessen distortions caused by the arbitrary allocation of the indirect costs obtained in the traditional systems (Pokorná 2016). In fact, the ABC treats the customers as object of the cost analysis in line with analysis of the ownership costs for the suppliers. The system offers some guidelines to assists organization’s management implement the ABC initiatives and identifies significant organizational and behavioural aspects in ABC execution (Oseifuah 2018). ABC has assisted a good number of companies to manage their activities well especially when it combine with the total quality management and the business process re-engineering.
Benefits of ABC Implementation
The ABC has been declared as the modern cost management and accounting innovation which could be utilized in linking the firm’s operational performance as well as the actual financial performance. It could reveal how the firm’s activities align properly with all its strategic goals (Al-Qudah & Al-Hroot 2017). The system delivers more useful and precise evidence compared to traditional costing system. Besides, utilization of the ABC improves the insights into the causes of the costs, offers better costing control as well as cost management, and offer more accurate information for service or product pricing and costing, offers relatively improved managerial decision-making and offer better understanding of the cost reduction chances (Maiyaki 2011). Basically, the ABC is ore representative distribution process of the resources utilized since cost allocation is mostly based on direct cost drivers.
“Power, discourses and accounting change: the implementation of activity based costing in a Portuguese bank” By Vieira & Hoskin, (2005), examine the dialogue and accounting changes through execution of the ABC within Portuguese Bank. It explores application process adopted by Portuguese Bank in implementing ABC. The purpose of this study was to make significant contribution to the current research in development as well as enactment of the ABC by spotting the flows and ebbs in enactment of such costing approach. Besides, the study looks to varying financial environment or framework within Portuguese banking services as well as how the management undertaking variation utilize internal accounting tools in facilitating the adjustment process. To accomplish the research in this study had set out various research questions which include; first, what were specified objectives whenever a new costing system was being planned? Second, how did actual designing and execution conform to them? Who are the chief participants in execution? What were some of the behavioural and organization difficulties during implementation?
On the other hand, “The Practicability of Activity Based Costing (ABC) in the Nigerian Retail Bank” by Maiyaki (2011) examined the practicability of the ABC within the First Inland Bank operating in Nigeria. Basically, the purpose of this study was to evaluating practicability of the ABC in the First Inland Bank plc as a sample representation of the other retail banks operating in Nigeria. To accomplish its purpose, the researcher followed this main question: what is the importance of ABC?
In a study by Vieira & Hoskin, (2005) it was revealed that ABC was an approach that could offer significant info and has overcame all the barriers of the accounting being a fashionable and high-class field in accounting division. Besides it was found out that with the significantly high competition within the banking sector, ABC stands out as the key process of the change. Despite these facts, it was found out that as technology, the system was more problematic since it took more issues to execute. Besides, the study revealed that there were some unforeseen situations and features which created difficulties and which could have significant effect on the implementation process of the ABC. Furthermore, it was established that during implementation of the ABC, the team faced technical problems including lack of the employee’s time, selection of the cost drivers, resource allocation and choice of the activities that could influence successful implementation of the system. The study also revealed that ABC was too multifaceted because of the wide range of the diverse goals for this new system. It was found out that adequate preparation and assessment of the current condition prior to ABC implementation is done. The findings also indicate that implementation of the ABC in Portuguese Bank would enable the bank in managing its business processes and activities since it offer integrated and cross-functional view of the firm.
Purpose and Research Questions of the Studies on ABC Implementation
The study by Maiyaki (2011) revealed that ABC is practicable in First Inland Bank. Nonetheless, it was found out that implementation of this system is relatively difficult since according to the respondents; activities or tasks overlap and entail more than a single department or unit. It was also found out that ABC plays a significant part in allocation of cost in each cost centre or branch of the bank. The study established that ABC is an effective mean of the cost management within the bank and in specific in the banking sector. Besides, it was found out that every branch act as a cost centre making it easier for the ABC to be applied in assigning costs to these cost centres and their activities. The research revealed that the ABC could be implemented as one of the most effective costing technique in First Inland Bank, though currently the firm does not practice this system. Further, it was found out that by analysing the bank through ABC, different costs are usually attached to every activity. The study also revealed that around 90% of personnel working in First Inland Bank do not know anything about the ABC. It was also found out that implementation of the ABC is identification and differentiation and identification of cost driver or cost pool would be challenging. Hence, there is need to embark on mass enlightenment by accounting professions with a view to educated the bank’s directors and executive on the importance of implementing ABC.
Based on the above highlights it is evident that the two articles had similar views at one point. For instance, in both studies, it was revealed that ABC play a significant part in the bank in providing the firm with cost data on unitary cost to enable them in offering profitability by customer segment, channel and product. Additionally, in both studies, it is revealed that this costing technique was not originally recognized as the strategic initiative.
In spite of these similarities, the two studies differed in several ways. For instance, the two studies had different research questions that were addressed at the end of the study. Further, the two studies differed in that they respondents involved in the study had different views. For instance, a study by Maiyaki (2011), respondents did not know anything about the ABC, nonetheless, in the other study, respondents were fully away of the ABC and had different views on the suitability of this system.
Significant Features of ABC in Cost and Resource Allocation
There are a number of outcomes or lessons learned from the two studies which would be important for the management accountant’s professions operating in Australian firms. First the section would start with outcome or the lessons learned from an article by Maiyaki (2011) then followed by outcomes or lessons learned from an article by Vieira & Hoskin, (2005). On overall, the section would present two outcome or lessons learned from Maiyaki (2011) article and two from the other article.
The first outcome in Vieira & Hoskin, (2005) is that in spite of its complexity nature during implementation, ABC plays a crucial part in management evaluation. This means that there is need to ensure that the system is successfully implemented in the organization by doing everything possible. The lesson would enable the management accountants working in Australian firms to work towards enhancing successful implementation of the system by convincing all bodies of executive and management on the importance of ABC. Further, the lesson learned would enable the management accountants to train relevant personnel on the importance of implementing ABC on their companies. Through the article, the management accountant should give immense support during implementation of the ABC knowing that the systems provide the company with cost info on unitary cost data in providing profitability and accept the system as their own.
The second outcome or lesson is that ABC could be an effective cost system if implemented successful in the bank. Understanding the fact that ABC is an effective costing system would reduce the notion of some management accountant professional operating Australian companies to strive in ensuring that the system is implemented within their organizations. In fact, understanding the fact that ABC is an effective costing system, it would be easier for the management accountant to implement the system despite its complexity nature of its implementation. This would enable them in managing business processes and activities since through successful implementation of the ABC offer integrated and cross-functional view of their firms.
The first outcome or lesson that can be depicted from Maiyaki (2011) study is that ABC is a crucial part in measuring performance of activities and costs as well a cost objects. This is based on the fact that the ABC system assigns different costs to their relevant activities. By doing this, the company management is able to run its company operations successfully and smoothly. Besides, ABC traces costs to various activity levels instead of the products which in turn offers correct and accurate view of the firm cost consumption. Basically, this lesson is based on the fact that ABC is a management accounting systems that is used in quantitatively measuring costs, costs objects and resources. The systems captures the costs for aspects of administrative expenditures production, and applies these costs to specific activity structure. This in turn provides a more accurate means of allocating costs of indirect and direct resources to activities. This lesson is of great importance to management accountant professions especially the one working in Australian companies to effectively enhance ABC system in their organization management accounting practices.
The second outcome or lesson that could be derived from this study which could be significant to accounting professions in Australia is the need to educate the management on the importance of ABC. Through this, management accountants working in Australian companies would strive to offer support for the implementation of ABC and try to create and maintain organization support through involvement of all personnel. This could in turn helps in improvement of the organization management performance and reduces probable resistance for ABC that might arise from some employees. Basically, by ensuring that all personnel are fully equipped with information about the ABC, the management accountants would be able to reduce any form of resistance during implementation process and therefore allow the system run smoothly within their companies.
Conclusion
In conclusion, activity-based costing is considered as the process of charging the overheads to their cost units. The system assigns the costs to the relevant activities based on resource usage and allots the costs to the objects on activity usage. Further, it is clear that ABC measures activity and process performance, determines the cost of process outputs, process effectiveness and captures costs for aspects of production, as well as administrative expenditures. Two articles are picked for discussion where it was found out that ABC play a significant role in organization’s management productivity in that is assist the management in determining whether the firm is progressing well. In fact, based on the two studies, ABC is found to offers relevant information on how efficiently and effectively the firm manages most of its resources.
Therefore, with ABC an entity or a firm could easily estimate cost components of the whole products and its services and helps in identifying and eliminating the services and products that are unprofitable and lowers prices of the products that are overpriced. Based, on the two studies, it was found out that ABC has fundamental features in seeking to lessen distortions caused by the arbitrary allocation of the indirect costs obtained in the traditional systems. Moreover, it was found out that implementation of ABC helps in improving the insights into the causes of the costs, offering relatively better costing control as well as cost management and so forth. Further, through the analysis of the two studies, it was found out that ABC plays a significant part in the bank in providing the firm with cost data on unitary cost to enable them in offering profitability by customer segment, channel and product. Therefore, management accountant professionals working in Australian Companies should embrace implementation of ABC in their companies to enhance better and smooth running of the organization operations.
List of References
Al-Qudah, L & Al-Hroot, Y (2017), ‘The Implementing Activity-Based Costing Technique (ABC) and Its impact on Profitability: A Study of Listed Manufacturing Companies in Jordan,’ International Journal of Economics and Financial Issues, 7(2), 271-276.
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.
Maiyaki, A. A. (2011). The Practicability of Activity Based Costing (ABC) in the Nigerian Retail Bank. Business Intelligence Journal, 4(2), 351-354.
Oseifuah, E K (2018), ‘Activity based costing (ABC) in the public sector: benefits and challenges,’ Journal of Management Accounting, 12 (1), 4-2.
Pokorná, J (2016), ‘Impact of activity-Based costing on financial performance in the Czech Republic,’ Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 64(2), 643-652.
Rbaba’h, A (2013), ‘The influence of company characteristics factors to activity based costing system implementation,’ Journal of Education and Vocational Research, 4(2), 36-46.
Sarokolaei, MA, Ebrati, M, Khanghah, VT & Ebrati, M. (2012), ‘A comparative study of activity-based costing system and the traditional system: A case study of Refah Bank,’ African Journal of Business Management, 6(45), 11221-11230.
VieiraVieira, R., & Hoskin, K. (2005). Power, discourses and accounting change: the implementation of activity based costing in a Portuguese bank. Journal of Applied Management Accounting Research. 1 (1) 220-245.
Zaman, M (2009), ‘The Impact of activity based costing on firm performance: The Australian experience,’ International review of Business research papers, 5(4), 200-208.
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