Evaluation Of Labour Hours And Activity-based Costing Methods

Implication of ABC costing system for Wayco Leisure

1. You, as the consultant management accountant, are required to write a report to the directors of Wayco Leisure. The report should Evaluate the labour hours and the activity-based costing methods in the circumstances of Wayco Leisure.Examine the implications of activity-based costing for Wayco Leisure, and in so doing evaluate the issues raised by each of the directors.

2. You are required to undertake research to find two journal articles centred on the use of activity based costing in the service sector. Using these articles and what the authors’ findings, discuss how activity based costing could be used in a university. In your answer provide examples of cost pools that may be appropriate.

Evaluation of labour hours and activity-based costing methods

By considering the above statement, it can be said that both the method are giving different results but costing compute ABC method is more accurate as in this allocation is done as per separate cost drivers instead of taking blanket rate. It is providing an appropriate base for the costing of product or services, thereby resulting in more reliable pricing decisions (Appelbaum, and et al., 2017). Further, it will also help to increase and to interpret overhead as well as cost drivers while enabling directors to eliminate the non-value adding and expensive activities (Hofmann and Bosshard, 2017).

The implication of activity-based costing for Wayco Leisure

The implication of ABC system offers an opportunity for precise communication amongst functional areas on the problems related to production. The main issue of ABC implication is that it needs complexity in formalities of consumption of resources and the processing of data and information (Al-Nuaimi, Mohamed and Alekam, 2017). The main benefits of the implication of ABC system are improvement and effectiveness in business procedures while it ensures better allocation of resources with high competency and profitability in activities. Along with this, it also benefits business in determining the wasteful products while ensuring the optimum utilization of available resources (Cugueró-Escofet and Fito, 2016).

As per the finance director, Unwind model is not viable to produce as the cost is higher in comparison to sales.  Further marketing director can provide a discount for getting Away model as there is sufficient margin for a company which can be reduced for getting a big order. This will provide the benefit of economies of scale and increase overall profits.

The concern of managing director is viable as activity-based costing has some limitation but it can be further improved over the years, and it is comparatively better than traditional costing method. The approach given by Chairman is not viable, it is because consideration of individual profit is essential to determine the profitability of each segment to strengthen overall portfolio (Chenhall and Moers, 2015). For example, the company can increase their profits by eliminating unwind model.

Benefits of ABC system

ABC system has interpreted and realized that the resources in the organization are required for the direct production of commodities and services and direct product as well as support practices. The main objective of ABC is to evaluate and then set prices of resources employed for practices that do a production of product and series for clients (Chea, 2011).

The ABC costing technique has been widely adopted by universities with the core presumption that it provides better accurate identification of costs in comparison to traditional techniques. This approach makes costing system of universities more manageable. This approach provides, better cost drivers for the purposes of Maximizing Resources (Mahal and Hossain, 2015). In universities, costs can be assigned on the basis of per-FTE student enrolment and per-student credit hour. These type of cost drivers are apparent, relatively simple to determine, and straightforwardly understood by the universities for assigning cost and making financial decisions. For example; salary and benefit expenses of professor which collected by the academic unit and can be allocated to activities for each academic unit on the basis of multiplication of these costs by the projected fraction of time spent by staff on each activity.

Activity-based costing provides in-depth data that can be used by higher education administrators of universities so they can allocate resources in an efficient manner. Further, this will provide a better approach to policymakers for better understanding regarding the fact that what colleges do. Primarily, this approach will provide information to universities which will result in improved planning by having a multiyear strategizing plan or for the targeting of definite initiatives in short period of time.

Activity-based costing techniques allow universities for making following additional comparisons:

• Comparative assessment against peer institutions
• Comparative assessment among individual branches or campuses for universities
• Comparative assessment over time
• Comparative assessment of instructional costs between academic units in universities

Being an effective system, the ABC has stemmed itself in the manufacturing industry, and a majority of the research on ABC puts highlights on its implementation during manufacturing establishment. Further, it should be recognized that the important and rapidly increasing economic activity occurs in the non-manufacturing industry. The ABC costing system has been applicable in all the service sectors intensely. It is reviewed that, the study of Haladu (2016) 70% of observed studies and research conducted are emphasized on service industries, while the remaining 10% is manufacturing-based and 20% on manufacturing as well as service sectors.

For addressing and overcoming the ABC shortcoming in service industries, it is required to consider PFABC that is focused ABC system in order to offer a mixed ABC information system that can utilize; for the effective control of performance, to address problem related with traditional ABC and to expand the implications imposed on traditional ABC (Haladu, 2016).

The employment of ABC costing system in service sectors has facilitated in offering precise information on procedures and activities. It is predominantly because of the high reliance on apportionment on activity rather than volume and the utilization of drivers of cost (Dale and Plunkett, 2017).   The consideration of activity in accordance with the ABC, on the other hand, fears the rejection of non-daily activities in the production. Due to the activities engaged in this operation are not conducted on frequent based, and then these are not used to determine cost drivers.

References

Chea, C. A., 2011. Activity-Based Costing System in the Service Sector: A Strategic Approach for Enhancing Managerial Decision Making and Competitiveness. International Journal of Business and Management. 6(11). Available through <www.ccsenet.org/journal/index.php/ijbm/article/download/11103/8985>.

Haladu, A., 2016. THE PRACTICABILITY OF ACTIVITY-BASED COSTING IN SERVICE FIRMS Alhassan Haladu. International Journal of Management Research & Review Available through < https://ijmrr.com/admin/upload_data/journal_Alhassan%20Haladu%20%201jul16mrr.pdf>.

Mahal, I. and Hossain, A., 2015. Activity-Based Costing (ABC)–An Effective Tool for Better Management. Research Journal of Finance and Accounting, 6(4), pp.66-74.

Ahmed, R. and Kannaiah, D., 2016. The considerations for the implementation of an Activity Based Costing System (ABC).

Dale, B.G. and Plunkett, J.J., 2017. Quality costing. Routledge.

Al-Nuaimi, S.I.M., Mohamed, R. and Alekam, J.M.E., 2017. The Link between Information Technology, Activity-based Costing Implementation and Organizational Performance. International Review of Management and Marketing, 7(1).

Appelbaum, D., Kogan, A., Vasarhelyi, M. and Yan, Z., 2017. Impact of business analytics and enterprise systems on managerial accounting. International Journal of Accounting Information Systems, 25, pp.29-44.

Chenhall, R.H. and Moers, F., 2015. The role of innovation in the evolution of management accounting and its integration into management control. Accounting, Organizations and Society, 47, pp.1-13.

Hofmann, E. and Bosshard, J., 2017. Supply chain management and activity-based costing: Current status and directions for the future. International Journal of Physical Distribution & Logistics Management, 47(8), pp.712-735.

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