Activity-Based Costing
Discuss about the Efficientm Strategic Management Process.
Management accounting helps in determining the goals to search the direction to reach those goals. It is important to prepare the plan of operating the business and its financial activities. Therefore, it has been said that the business who does not manage management accounting tools in their operations need to face huge losses in the future (Gartenstein, 2018). This report is being presented to highlight the importance of management accounting and its use in the business. The report will talk about JB-HI-FI Company and its objectives and strategies. Activity-based costing which is one of the tools of management accounting will be implemented to explain its support in attaining the corporate strategies and objectives of JB-HI-FI Company. The report will explain major aspects of Activity-based costing. Moreover, it will provide some recommendations that should be focused by JB-HI-FI Company while implementing this tool of management accounting. In the end, suggestions will be provided regarding the management accounting tool that can also be used in place of ABC system.
Activity-based costing is one of the accounting methods that can be used to find and assigns costs to the activities of overhead and then assigns them to products. An ABC method identifies the relationship between manufactured products, overhead activities and costs and by this relationship; it consigns indirect costs to the products less randomly as compared to traditional methods (Kali?anin & Kneževic, 2013).
ABC method or system is significantly utilized in the industry operates manufacturing of the products because it increases the cost data reliability, and provides true costs and better-categorized costs experienced by the company in the course of production. This system of costing is majorly used for product costing, service pricing, target costing, analysis of customer profitability and analysis of product line profitability. Along with this, it is also famous in the companies because through this they can make a improved corporate aim and policy it the costs are better unstated (Zeuner, 2012).
The system of ABC tool is built on the business activities which can be any transaction, job, task, or event, like designing products, setting production machine, operating machines, or distributing finished goods. Activities consume resources of overhead and are said to be cost objects. In Activity-based costing method, a business activity can also be called as an event or transaction that is a cost driver. A cost driver is also called an activity driver and used to state an allocation base. Some of the examples of cost drivers are upkeep requests, acquisition orders, manufacture orders, machine setups, quality examinations, or power consumed (Maingi, 2013).
JB-HI-FI Company
The activity measure’s categories are transaction drivers, which include the number of times an activity occurred, and drivers of duration, which helps in calculating the time it takes to finish. Distinct to the systems of traditional cost measurement that is based on volume counts like direct labor hours and machine hours in order to assign an overhead cost or indirect costs to the products, the system of Activity-based costing divide five broad activity levels that are, at some level, unconnected to the units produced. These levels comprised of unit-level activity, product-level activity, batch-level activity, organization-sustaining activity, and customer-level activity (Emblemsvåg and Bras, 2012).
- The ABC system helps in increasing the cost groups that can be utilized to assemble cost of overheads.
- The ABC system is majorly utilized in the manufacturing industry.
- It identifies the relationship among overhead activities, manufactured products, and costs (Kim, 2017).
- It helps in eliminating the services and products that are not providing any profit to the company. Along with this, it supports in reducing the prices of the activities that are overpriced.
- Activity-based costing eliminates the procedure of service or production that are unsuccessful and assign handling concepts that lead to the similar product at a healthier yield.
- The overall cost is categorized into two parts that are fixed cost and variable cost which is important to offer quality information to make a proper cost system in the company.
JB-HI-FI is a New Zealand and Australian consumer goods retailer, with specialization in Ultra HD Blu-rays, electronics, hardware, mobile phones, video games, DVDs, electrical home appliances, number of Telstra services, and CDs (Investing, 2018). The company has its head office in Melbourne. The company has 112 stores including TAS, NSW, ACT, and VIS. JB-HI-FI Company was situated in 1974 by John Barbuto (Register, 2017). Barbuto sold his business to Richard Bouris, Peter Caserta, and David Rodd in 1983 who worked hard to expand the JB-HI-FI into ten stores chain in Sydney and Melbourne. In 2000, the company was purchased by a private banker and executive with the purpose of taking the effective model at the national level. In 2003, the company got listed in the Australian stock exchange.
Mission- JB-HI-FI Company’s mission is to deliver a professional HI-FI range at lowest prices.
- The objective of the company is to create systems to allow continuous reporting and evaluation of progress towards the accepted objectives of gender diversity.
- To perform a thorough review of the pay of the employee in order to consider that whether there is any gender-based difference exists.
- Company’s further objective is to do development of flexible and part-time work practices, with particular concentration on the return on the work from maternity leave (AFRA Access, 2013).
Product- JB-HI-FI is a consumer goods company. It majorly focuses on the trade of video games, DVDs, Blu-rays, and music compact disks, along with electronics/hardware and white goods. The electronics in include computers, smartphones, in-car stereo, laptops, and entertainment, game consoles, accessories, TVs, and digital cameras. Apart from this, the company also offers customers a variety of services (Boot, 2017). Additionally, JB-HI-FI Company offers information technology, consulting services, and telecommunication services. The company objective is to develop more products by increasing the number of stores in the market.
Price- Being part of competitive advantage, JB-HI-FI is first New Zealand and Australia’s biggest store for consumer electronics products, small appliances, home entertainment, and white goods. The strategy of the company that has added in the position and growth is its discount pricing, which attracts customers (JB-HI-FI, 2017). The company is trying to position itself as a discount retailer, by gaining the capability to provide products at low cost. The ability of the company to provide such prices is by its operations scale, which includes low cost of operating a business and high stock turnover.
Implementation of Activity-Based Costing in JB-HI-FI
Place- JB-HI-FI has 190 stores in all over Australia and New Zealand. The company has separated its stores into JB-HI-FI HOME and JB-HI-FI stores. In the company’s stores, they sell electronics from various OEM manufacturers that deliver the company with a varied range of products. The OEMs are comprised of Sony, Acer, Samsung, LG, Canon, Google, Toshiba, JVC, and Apple. In the stores, company establishes small appliances for the consumers searching to buy these types of appliances with electronics. The JB-HI-FI HOME includes fridges, washing machines, and cookers. These stores majorly deal in big household appliances, which might be bulky for the stores.
Promotion- Promotion is an element of marketing mix. It is comprised of increasing product awareness to the target audience or institutional awareness. Promotion of product involves convincing the consumers to select the products of the company over its rivals, whereas institutional promotion involves making an accountable and constructive image to the public. In order to achieve both the objectives company make use of sales promotion, direct marketing, public relations, advertising and personal selling.
Activity-based costing is not so complicated in implementing in the business operations especially when the better assignment of the overhead cost, cost drivers and activities is needed. JB-HI-FI Company can implement this system in its business operations to reduce the overpricing of the activities, (product, price, place, and promotion) and manage the activities with resources. The company has various activities involved therefore it needs to follow some implementation steps i.e.
Examine costs and procedures- The activity-based costing system is process oriented. Hence, the initial step of this implementation procedure is a detailed study of every costs and procedure. This study will involve an employee of the JB-HI-FI Company. This is important because getting detailed information is very important for this system which can only be received from the employees (The Strategic CFO, 2018).
Finding business activities- Once there is a complete understanding of the company, the next step is to focus on the activities that are the central part of the cost allocations. It should be considered that too many activities cannot be managed properly.
Allocate cost to the activities- At this step; the cost is assigned to the activities that are important for the business operations of JB-HI-FI Company. Occasionally this is simple and rational, and it sometimes becomes challenging. For instance, there might be a distinct group of industrial engineering that looks for nothing but set up of the machine first for the production (Qudah & Hroot, 2017).
Cost Volume Profit Analysis
Apply Costs to Objects- The finishing stage is to apply the rates based on activity in defining the activity cost amount in order to assign to every cost object (E-Library, 2018).
- From the above analysis it can be said if there will be lack of management and employee support in the execution of ABC system then the strategy can result in failure.
- Without explaining the purpose of the ABC system, it should not be implemented in the company because this cost accounting system involves various approaches.
Management accounting involves various tools which are very helpful in attaining the objectives and management of cost. JB-HI-FI Company can implement Cost Volume Profit Analysis in place of Activity Based costing so that it can manage the cost of its activities along with resources. CVP analysis is dependent on describing the breakeven point of the volume of the product and cost of the product and can be used by the management of the company for extracting important information and making effective decisions for the company in regards to short-term economic. The cost-volume-profit analysis makes various assumptions to be relevant comprising sales price; variable cost and fixed cost per unit are constant (Cafferky, 2010). CVP is one of the tools of cost accounting that is related to the influence of variable levels of product cost and sales will have on the operating profit. This tool is only dependable if prices are fixed at a stated level of production. Every unit that is produced are assumed to be sold and costs should be fixed or variable in a CVP analysis (Accounting Explained, 2013).
Conclusion
Management accounting plays an important role in the successful functioning of the business because it helps in identifying, classifying, and interpretation the cost of the business and make financial reports and statements in order to help the management of the company to take proper decisions. The above report has discussed the activity-based costing system and its important features which explain how it works. Besides this, an overview of JB-HI-FI Company has been provided along with its mission and objectives. The report has helped in knowing the significance of activity-based costing and how it will help JB-HI-FI to achieve its mission and strategies. Moreover, a report has provided one suggestion of the tools of management accounting i.e. Cost volume profit analysis.
References
Accounting Explained. (2013). Cost Volume Profit Analysis. Retrieved from https://accountingexplained.com/managerial/cvp-analysis/
AFRA Access. (2013). JB Hi-Fi Limited. Retrieved from https://member.afraccess.com/media?id=CMN://3A392967&filename=20130812/JBH_01432775.pdf
Boot, S. (2017). Jb-hi-fi working on strategy for NZ business after writedown. Retrieved from https://www.nbr.co.nz/article/jb-hi-fi-working-strategy-nz-business-after-write-down-poor-2017-performance-b-206422
Cafferky, M. (2010). Breakeven Analysis: The Definitive Guide to Cost-Volume-Profit Analysis. 1st edn. New York: Business Expert Press.
E-Library. (2018). The Steps to Implement ABC. Retrieved from https://ebrary.net/389/accounting/steps_implement_abc
Emblemsvåg, J., and Bras, B. (2012). Activity-Based Cost and Environmental Management. 3rd edn. Germany: Springer Science & Business Media.
Gartenstein, D. (2018). Why Is Financial Management So Important in Business? Retrieved from https://yourbusiness.azcentral.com/financial-manageme. nt-important-business-4406.html
Investing. (2018). JB Hi-Fi Ltd (JBH). Retrieved from https://au.investing.com/equities/jb-hi-fi-company-profile
JB-HI-FI. (2017). Annual report. Retrieved from https://www.jbhifi.com.au/Documents/2017%20Annual%20Report.pdf
Kali?anin, D., & Kneževic, V. (2013). Activity-Based Costing As An Information Basis For An Efficientm Strategic Management Process. Economic Annals, 8(197), 95-119.
Kim, Y. W. (2017). Activity Based Costing for Construction Companies. 1sr edn. U.S: John Wiley & Sons.
Maingi, J. (2013). Advantages & Disadvantages of activity based costing with reference to economic value addition. 1st edn. Germany: GRIN Verlag.
Qudah, L.A., & Hroot, Y.A. (2017). The Implementing Activity-based Costing Technique and Its Impact on Profitability: A Study of Listed Manufacturing Companies in Jordan. International Journal of Economics and Financial Issues, 7(2), 271-276.
Register. (2017). JB-HI-FI. Retrieved from https://theregister.co.nz/news/2017/08/jb-hi-fi-plans-new-strategy-sales-slump
The Strategic CFO. (2018). Implementing Activity Based Costing. Retrieved from https://strategiccfo.com/implementing-activity-based-costing-2/
Zeuner, P. (2012). Activity-Based Costing. 1st edn. Germany: GRIN Verlag.
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