The vision of David Jones Limited
Management is the procedure of recognizing, evaluating, analyzing, understanding, and communicating info to the administration that is focused towards attaining the goals of the organization (Nørreklit, 2017). Management accounting is also called cost accounting. The main dissimilarity between financial accounting and managerial accounting is that financial accounting is attentive towards offering data to the external parties of the company, and management accounting information is supporting the executives in the business in taking proper decisions. There are various tools available that support management accounting determines and handle their resources, costs, and strategies of the organization (CGMA, 2013). One of the significant tools of management accounting that support organizations in planning their budgets and managing resources of every activity of the business is Activity based budgeting. The purpose of this report is to highlight the use of activity based costing and its features in an organization. The organization that has been selected for pursuing this report is David Jones, which is an upmarket department store in Australia, deals in different products and altering its operations with time. After discussing this report will review whether Activity based costing will be suitable for David Jones or not. In the end, an argument will be presented that will highlight the dissimilarity between traditional budgeting and activity based budgeting.
David Jones is the upmarket department store of Australia, which is owned by the retail group of South Africa i.e. Woolworths Holdings Limited. David Jones established this firm in 1838, a Welsh trader, and forthcoming politician after he settled to Australia, and is the eldest unceasingly functioning department store in the whole world still operating under its original name. Presently, David Jones Limited has 45 stores placed in most of the states and territories of Australia (except in the Northern Territory and Tasmania) (IBIS World, 2013). The main rivals of David Jones are the big, high-class subdivision chin of store i.e., Myer. In 2016, the company opened its first store in New Zealand market after purchasing Kirkcaldie & Stains. In the same year, the parent company of David Jones i.e. Woolworths Holdings Limited proclaimed that headquarter of the company is shifted from Sydney, New South Wales to Richmond, Victoria (David Jones, 2018).
In 2013, Myer management approached David Jones with a provisional, non-binding, revealing offer for a possible union of the two businesses. Myer thought that the combined group would have produced highest earnings and sales before tax and interest in 2013 of around $5.0 billion and $364 million, correspondingly. Moreover, Myer estimated that a union of both the companies could have helped in attaining around $85 million of continuing yearly cost collaborations within three years, mainly determined by organizational competences. The David Jones board disallowed the proposal in November 2013 (David Jones, 2018). In 2014, again Myer went to David Jones offering to purchase the business at market value, with David Jones possess a market capitalization of around $1.7 billion. Myer also specified that its CEO Bernie Brookes would be competent in handling both the entities if the merger will take place. David Jones recognized the letter affirming it would think about any offer that will be in the best interest of the company’s shareholders (David Jones, 2018).
Features of Activity based budgeting
The vision of David Jones Limited is to be the most responsible retailer in the world that could reflect their passion and commitment to be involved in a good trade, for their people, planet, and customers (Woolworths Holding, 2018).
The mission of David Jones Limited is to add value to the life of people by offering good quality products and enhance the experience of their people and customers (Woolworths Holding, 2018).
The values of David Jones notify and reinforce the manner they do the business across their group. From the value-centric leadership to passionate brand support, they look to implant their values in all the extents of their business. The values reflect that they are consumer obsesses, stimulating, accountable, combined, and dedicated towards the quality (Woolworths Holding, 2018).
Budgets are generally planned for the areas in an organization and for different activities. System of budgeting i.e. Activity based budgeting offer the inclusive financial plan to the business as a whole and offers a business various advantages such as it enforces executives to plan, and it offers information of the resources that could be used to enhance the procedure of decision making (CGMA, 2013). Besides this, it assists in the utilization of employees, resources by placing a standard that could be used for the succeeding performance assessment, and it enhances coordination and communication among customers, organization, and employees. Budgeting forces administration to do planning for the upcoming period to frame direction for the business, predict issues, and improve future strategies. When executives spend their time in planning, the understanding of the capabilities of the business increases and the understanding of where the key resources of the company must be used increases. Budgets allow executives to make improved decisions. They support executives to predict their potential variances, particularly in shortfalls (Huynh and Huynh, 2013). By evaluating differences to discover the cause, support managers develop activities of the organization to attain the planned goals. Budgets set the criteria that can regulate the use of resources of the company and employee’s motivation.
Activity based budgeting is the technique that researches, analyze, and records activities that are valuable for the business. Activity based budgets are just regulating preceding budgets to check the inflation or development of the business (Oneshko and Boiko, 2016). In its place, ABB identifies efficiencies in the operations of the business and creates budgets based on different activities involved. The two fundamental and basic notions that motivate the usage of ABB are Activity Based Costing and Activity Based Analysis. The first is the set of processes and rules utilized in evaluating, assigning, and tracking cost to objects, whereas, the second concept is the heat of valuation all the function in the fundamental detailed elements. In order to adopt activity based budgeting, business must have sufficient funds that can support business in bearing the expenditures that are incurred at the time of conducting research and preparing budgets under this system (Moustafa, 2005). This method is a time consuming which comprises detailed analysis and research to prepare the budgets of the business. However, activity based budgeting helps in getting detailed and precise information about the cost that can be incurred while planning changes in the future.
Activity based budgeting is a costly method of budgeting as it requires the involvement of executives and experts that possess the detailed knowledge of the business as well as the market. Moreover, it is comprised of detailed analysis and research that could not be conducted without the support of management and funds (Bragg, 2016).
It takes a lot of time to arrange the data and perform the research to identify the relevant activities as well as resources required to attain the goals. Therefore, it is a very time consuming procedure (Bragg, 2016).
Traditional budgeting systems only check the previous year results to prepare the current year budget that does not provide a company reliable as well as precise information about the expenditures that are going to incur in the future. However, activity-based budgeting is one of the reliable systems because it performs a detailed analysis of the activities and the cost associated with them (Drury, 2008).
The system of activity based budgeting removes all kind of needless activities that support the company in saving its costs. The saved cost is the utilized in the goods production at less cost (Drury, 2008). Besides this, it, help the business to attain a competitive edge over its competitors.
The system of Activity based budgeting support in enhancing the company’s relationship with its stakeholders particularly with the consumers. The key objective of this system is to exclude the excessive activities and offer the consumer the best quality at a reasonable price. This makes compulsory for the workforce of the business to assist customers in the best possible way and ensure their increased satisfaction (Bragg, 2016).
Method of activity based budgeting measures every cost driver in the business. It considers all the possible phases included in an activity. The immaterial activities are eradicated and only the required activities are included to generate value for the business (Drury, 2008).
The focus of activity based budgeting is towards the short-term objectives of the company. It does not consider the long-term situation of the company as it focuses more on the short term goals that could be proved to be very incurable for the organization (Bragg, 2016).
The process of budgeting makes use of various resources of the business that need the requirement of the top administration of the company for conducting the analysis (Drury, 2008).
Traditional budgeting is a technique of preparing budgets in which the previous year’s budget is considered as a base. The budget for the current year is prepared by doing some alterations to the budget of the previous year by amending the overheads depending on the customer demand, the situation of the market, and inflation rate, etc. Whereas, Activity based is a system of planning in which cost is linked with the activities and budgeting expenditure is then compiled based on the expected activity level. Unlike other methods of budgeting, activity based budgeting adjust cost levels for inflation and changes in the revenue to derive the yearly budget (E-Finance, 2018). The key objective of budgeting is enhancing and controlling the efficiency. From the analysis, it could be said that Activity based budgeting has several advantages as compared to traditional budgeting. ABB creates a target and motivates managers to operate towards attaining the goals of the organization. The company makes use of activity based budgeting to assess its competence and success. Competence is attained when the process of the business is performed effectively, with zero percentage waste. The ABB offer a valuation of the competence of an executive. This is because it helps in comparing the definite outcomes with the pre-planned budgeting activity. Success means that an executive attains or surpasses the described goals (Pietrzak, 2013).
Activity based budgeting upkeep some potential as an answer to the errors and hindrances of methods of traditional. Traditional budgets do not recognize any type of waste whereas activity based budgeting disclose non-value costs. Traditional budgeting concentrate on the employees and activity based budgeting concentrate on the workload on the employees (Smith, 2018). Besides this traditional budget, concentrates on the cost of divisions and activity based budgeting talks about the cost of the process. Traditional budgets talk about the fixed versus variable costs and activity based costing talks about used capacity versus unemployed capacity. Traditional budgets evaluate effect whereas activity based budgeting evaluates root cause (Shane, 2018).
Activity based budgeting is said to be a substitute to the government traditional budgets, the line item might be essential according to the law, but there is nothing stopping a company from accepting the activity based budgeting to resolve the internal business issues. ABB system is useful for the businesses experiencing changes in terms of material, like new subsidiaries, locations of the business, products of the business, significant consumers, etc. Because traditional method just adjusts a budget of the previous year. Traditional budgeting is a system that lacks in offering consistent and detailed information whereas today organizations adopt activity based budgeting just because it provides them more consistent as well as detailed information to manage the expenditures that take place to complete different business activities (Surbhi, 2017). Moreover, ABB also provides detailed information that offers various opportunities and data cross-analysis to the company. Unlike traditional budgeting method, the ABB method analyses the present opportunities and assign resources precisely to every activity. Businesses select activities or task depending on the goals of the company, like enticing new consumers or involved in a new business line, then assign spending by arranging activities as per priorities. This procedure is very beneficial for the companies with huge history from scratch.
From the above analysis, it has been identified that activity based budgeting is beneficial for those organization that has a long history and regular make changes in its processes as well as activities. David Jones is one of the well-known chains of an upmarket department store in Australia comprised of different departments and activities. David Jones is regularly experiencing the changes in its business such as the addition of different types of products in its offering, material change, expansion in the different market, etc. Moreover, it has a very long list of future planning and one of them is to open its second store in the New Zealand market with different as well as quality offerings (Inside Retail, 2018). This reflects that the company is regularly gets affected by altering the cost of material, infrastructure, the rate of land, etc. that disturbs the budget of the company. Therefore, it can be suggested that in order to operate effectively with the frequent changes in the market as well as in the business operations David Jones need to avoid its traditional budgeting system and must adopt activity based budgeting.
ABB budgeting will offer reliable and detailed information of the changing resources price to the business. Moreover, before creating the budget this system perform proper analysis and investigation of all the activities involved in the business to identify the actual cost that could be incurred and irrelevant activities that can be eliminated from the process. Elimination of irrelevant activities also supports in saving the cost that eventually could be used in the business for the production of the service or product. Besides this, activity based budgeting delivers genuine data in terms of a number of cost declines defined by the cost upgrading initiatives, thus offering auditors another standpoint to the costs (Hansen, Mowen and Guan, 2007). This reflects that the Activity-Based Budgeting can add something to the growth and performance of the business in different industries. Moreover, if activities based budgeting will be adopted within the financial system of the David Jones then the managers of the business could look at the business as one single system from the initial stage to the last stage, in place of individual departments. As the aim of the company is to offer quality to its customers due to its customer-centric approach activity based budgeting will help in maintaining the consumer focus culture. This system of budgeting will also make the strategic planning easier when there will be the only motive to satisfy the customer (Julyan, 2018).
One of the major advantages that could be observed after adopting activity based budgeting in the business is it encourages team spirit among employees of the company (C?pu?neanu, Topor and Rof, 2013). David Jones Limited is experiencing huge competition from its strong rival i.e. Myer because it frames different strategies to attract customers and increase its customer base. In order to deal with this and gain the competitive advantage against its rival activity based costing will help the company in planning a precise budget with the help of detailed research and involvement of top management. David Jones is one of the strongest players of the Australian market with maximum funds and huge investments that reflect that company can afford this budgeting system because it is a bit costly due to detailed procedure of the system.
Conclusion
The technique of management accounting i.e. Activity based budgeting is not a new concept but it is an effective technique that could change the image of the company in the market. It supports business in getting proper data and information of the capabilities it possesses to compete in the market. The above report has highlighted all the significant information that is required to understand the benefits of the budgeting system and attract businesses to adopt it for their growth. From the analysis, it has been suggested that David Jones Limited must adopt this system of budgeting in order to survive in the market for a longer time and manage the cost of changing resources and activities in the business. In comparison to traditional budgeting, activity based budgeting is much more reliable and valuable for the company to increase the revenue and eliminate the unnecessary cost incurred in the business. Moreover, activity based costing will not just analyze the future funds required for performing the activities but it will also help the company in understanding the importance of each and every activity involved in the business along with resources required to complete those activities. However, ABB is a costly system of budgeting that cannot be afforded by any business because it is long as well as costlier procedure. The report has also discussed the features of this system that shows that ABB budgeting enhances the relationship between the company and its stakeholders by eliminating the additional cost involved in the product that results in lower cost of production as well as increased disposable income of the customers. Traditional budgeting is different from activity based costing in terms of cost and time involved in preparing the budget, assignment of cost to the activities, reliability, etc. In the end, the suitability of activity based budgeting for David Jones Limited has been proofed by this report with the help of relevant data.
References
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