Activity Based Costing And Its Salient Features
Discuss About The Goals Of Maximizing Profitability Achieved.
Despite the many challenges that come with the adoption and implementation of the Activity Based Costing model, Cochlear Company Ltd can maintain cost leadership if its approval gets goodwill from the management as well as the user department and the staff. This model is an activity cost-oriented model, can help to quickly identify the avoidable costs within the processes thereby helping the management make informed decisions as well as take appropriate measures to mitigate against them or overly reduce them to manageable levels (Weiner, Tu, Javan and Taheri 2018). Through this value will be added to the chain of activities in production. The company will, therefore, be able to compete favorably regarding pricing since the cost factors within the product chain would have been reduced or avoided. It will also be able to maintain cost leadership through reduced costs. In the long run, the overall goals of maximizing its profitability will be achieved. The value will also be added to customer focus activities including improving the quality of their products as a result of decreased costs.
This is a costing technique that effectively allocates overheads to those activities which it relates to in the organization. It can as well be used for the overall reduction of overhead costs. The model can be best applicable in organizations harboring much machinery, producing many products as well as in those organizations that engage in complicated processes that are not easy to separate (Redding and Turner 2015).
CIMA explains activity-based costing as an approach to the costing and monitoring of activities, which involves tracing resource consumption and costing final outputs. Under this method, resources are allocated to activities, and the activities are assigned to cost objects (McBain et al. 2018).
It, therefore, gives room to managers to conclusively know about the final output and consumer’s net profitability, thus making available to the business-critical information that will aid managers make value-based as well as effective decisions that will help the organization achieve its long-term growth and sustainability objective. In the ABC model, the first step includes the identification and grouping of activities according to the cost ranking. The ranking methodology groups the process activities according to the simplicity to which the costs are readily identifiable to a given product. These ranks include the unit, batch, facility and the product level (Navathe et al. 2017).
Mission and Objectives of the Organization
The unit level processes are those processes which are carried out on every single product unit. Activities in the batch level are those which are performed whenever there is a batch product production. Product-level activities are those who are separately undertaken for every product unit. Facility-level activities involve those which are undertaken at the production level. Unit level activities are the easiest to trace while facility level activities are the most difficult to locate to products. Though the model will benefit the Company in the long run, some of the limitations include: As a complex model, it is relatively difficult to implement it. Since much time is required for the identification of the activities and the cost drivers; this makes it a complicated system to perform. The model is expensive, difficult to maintain and adjust. The model, therefore, gives focus to cost drivers and the activities that lead to spiraling costs of the organization (Weiner, Tu, Javan and Taheri 2018).
These are the characteristics of the activity-based costing model: The total costs are apportioned as variable as well as fixed costs respectively. These costs help in the provision of adequate information for the organization to come up with a favorable costing model. Then the next feature is that under this approach, differences are derived out of the pattern as well as cost behaviors. The designs, in the ABC model, are characterized by being time, diversity, events, and volume related. Lastly, proper costs have to be known to help in tracing the overhead costs associated with a given unit of a product (Esztergár, Rózsa and Tettamanti 2018).
As it continues its operations, Cochlear limited aims at achieving the following purposes, enhancing the people’s ability to hear, enabling individuals to interact, changing individual’s perception on hearing loss, as well as being innovative by delivering unique products in the market (Viveros, Kalfa and Gollan 2018).
Customer focus: The Company focuses on bringing customers lifetime value through the following strategies, leading to innovative and quality products that meet their user and customer needs. It will also ensure that there is adoption of customer-focused information systems that meet the customer needs as well as their preferences (Raz, Druehl and Blass 2018).
Organizational performance: Cochlear focuses on unique production activities which are aimed at achieving its full potential and it made this through implementing culture and values that individuals within the organization can quickly adapt to as well as providing tools and processes for performance management.
Objectives of the Cochlear Limited
Shareholder value: The Company ensures the creation and attainment of shareholder value through revenue maximization, creating an optimal sales mix as well as adopting a favorable dividend policy. The organization can, therefore, adopt the ABC model which could help it effectively and efficiently allocate costs within the organization, hence helping it minimize the probable costs as well as attain its objectives.
For the organization to stay ahead of its competitors in the competitive market, the company has adopted different strategies that will help it achieve its objectives as well as a decrease on the costs that it would incur an increase its revenue streams over a period. For its successful implementation, it has put in place the following strategies, ensuring leadership in developing innovative products, ensuring unique and acceptable designs as well as having a full commitment to the processes (Clarke and Gholamshahi 2018).
By fully adopting and implementing these strategies, Cochlear Company Ltd would thus minimize costs that may accrue throughout the production process hence attaining value maximization.
By adopting and fully implementing the ABC model, the organization can effectively achieve its strategies in different ways, including facilitating the process of cost efficiency through the provision of more accurate and relevant information on the activities that it undertakes (Goetsch and Davis 2014). Cochlear Company Limited can also maintain cost leadership if its adoption gets goodwill from the management as well as the user department and the staff.
This model is an activity cost-oriented model, can help to quickly identify the avoidable costs within the processes thereby helping the management make informed decisions as well as take appropriate measures to mitigate against them or overly reduce them to manageable levels. Through this value will be added to the chain of activities in production (Arora, Haleem and Farooquie 2018). The Company will, therefore, be able to compete favorably regarding pricing since the cost factors within the product chain would have been reduced or avoided. It will also be able to maintain cost leadership through reduced costs. In the long run, the overall goals of maximizing its profitability will be achieved (Majdalawieh and Marks 2018). The value will also be added to customer focus activities including improving the quality of their products as a result of decreased costs. The adoption and implementation of the ABC model will also allow for an accurate calculation of the cost price of their products in the market, and the clarity of the cost drivers will make it easier for the Company to identify the desired improvements in the production process making it more cost-effective (Karami and Danesh 2018). The organization will be able to calculate cost price factors hence bring on the benefit to the organization’s corporate strategy. As a result of all these activities, the primary objective of the organization of maintaining its performance in the market will be achieved hence maximizing the shareholder value (Allain and Laurin 2018).
Corporate Strategies Adopted by Cochlear Company Limited
The successful operation of the system requires a full commitment and goodwill of the staff of the organization. Cochlear Limited must ensure that all the parties in the organization are committed they must also be motivated to ensure that all the employees and the management are performing their duties as a group to enable the achievement of the Company’s goal (Gillespie and Privitera 2018).
The management should be involved in the provision of active support to all the parties that are engaged in the implementation process. They should provide enough resources necessary for the implantation. The management should also ensure that all the staff is supported and the issues that can hinder them from performing their duties are all solved. Lastly, staff training is equally essential as it will assist all both the management and employees to have a good understanding of how the Activity-based costing will help the organization in achieving its objectives. Through this, the organization will be able to accomplish its mission as well as meet its goals (Fang, Ma and Luo 2018).
Since the company aims at, maximizing profitability, providing value to its customers as well as maximizing the shareholder’s wealth value, the best alternative model that Cochlear Company limited should adopt is the Total quality model. This approach will ensure that there is a reduction or elimination of errors in the organization (Ross 2017). It will also help the Company to improve the experience of its Customers. As a result, the organization will be able to minimize costs or entirely avoid the expenses that result in an overall increase in the costs of the organization hence having a competitive edge against its competitors.
Conclusion
Organizations that aim at minimizing their costs are well placed to use the ABC model since it operation involves an identification of the activities as well as identifying the expenses within the businesses. This thus helps them to minimize the costs or avoid the costs entirely easily. It can as well implement cost reduction strategies that can help it reduce the costs. It can also be used by the organization to accurately assign costs to particular activities thereby helping them to improve decision making. Since decision making is critical to any organization, the ABC model will effectively provide useful information to aid it thus enabling it to achieve its strategic goals. The organizations may experience a lot of difficulty in the implementation process of the activity-based costing, but the enriched grasp and knowledge of the model implementation enable it to be more valuable. Many organizations that implement Activity-based costing may only apply it effectively if they all observe the organizational, political and behavioral aspects of the model implementation.
How the Activity Based Costing Model would help the company achieve its strategies
References
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