Explanation of ABC model and its features
ABC Model and its features:
The various activities that Aare being undertaken by the management of the company will be undertaken. The understanding of the various activities that are undertaken by the management will help in understanding the process of allocation of the indirect costs that are incurred by the company to the various functional areas of the entity. An understanding must be developed in respect of the relationship that is drawn by the ABC Model of costing between the various activities that are being performed, the costs that are being incurred by the entity and the various products that are developed by the entity (Malmi 2016).The relationship that is drawn by the ABC model enables the allocation of the indirect cost to the products made by the entity in a less arbitrary method than the traditional way of costing. There are various costs that are being incurred by the entity are difficult to be allocated under this method. The salary that is paid to the management of the company and the office staff of the entity are among the various costs that are difficult for the purpose of allocation (Hofmann and Bosshard 2017).
The entities that are engaged in manufacturing activities are able to make use of the method in a more effective and efficient ways than others. The reason being that the data that is given out by this method is more reliable than the one obtained from other sources. The method also lays down the true costs of the entities and which helps in the better allocation of the costs to the activities of the entity.
The method is effectively utilised by the management for the purpose of ascertainment of the costs that are incurred by the entity. The costs that are being ascertained include service pricing, target costing, product costing and the analysis of the product line. The method is successfully utilised by the management for ensuring that the strategies that are implemented by it are effectively implemented by it.
Some of the features of the ABC Costing model are as follows:
- The total costs that are incurred by the entity are divided into two categories that are variable costs and fixed costs. The division of the costs into two parts enable the management to get quality information for its management and creating a decent cost recognition system within the entity (Hammer 2015).
- For the purpose of decision making by the management the cost behaviour patterns are identified by this method.
- The various kinds of cost behaviour patterns that are being recognised by the method include volume related, diversity related, events related and time related.
- The cost drivers are also identified by the entity for tracing the overhead to a particular product.
- The cost drivers that are already present within the entity are the main components that dictate the cost behaviour of the entity.
Identification of the company’s mission and objectives:
The mission vision and the various objectives of the entity as constituted by the management of the company are as follows:
Alignment of ABC model with current company goals and strategies
a). Creation of increased returns for the shareholders of the company-
One of the main sources of finance is the equity capital that is given to it by the owners of the company. It is very significant on the part of the company to ensure that adequate returns are generated in respect of the equity shareholders of the company. the reason for this being that the shareholders of the company invest in it for the purpose of ensuring that higher returns are earned by them in the future. If the company fails to deliver the same, the future inflow from the shareholders of the company will stop (Krstevski and Mancheski 2016). For ensuring that strong returns are being generated in respect of the shareholders, the company ensures that the profitability of the business is increased. The company is reluctantly trying to improve its performance in respect of the sales that is being generated by the company in its favour and the reducing the costs that are being incurred by it.
b). Increasing the innovation and the creativity in its operations:
For ensuring that the company remains relevant in the changing times within the market, it is necessary that company come with ways that are innovative. This will help the company to deliver the products at a cost that is less than its competitors and develop products that meet the needs of the consumer in a better way. This helps the company to maintain a competitive advantage in the market (Krstevski and Mancheski 2016). Hence, the company ensures that the requisite human resource is inducted within the entity for the purpose of delivery of the products and services and the execution of the services in an innovative and better way. Thus ensures that the revenue that is being generated by the entity is increased.
c). Increasing the team spirit of the staff of the company-
The company tries to ensure that the team spirit of staff of the company is maintained. It is very important that the staffs of the company feel that the needs and the expectation of the employees are being respected by the company. This is required because the success of any strategy or the achievement of the any objective that has been ascertained by the company depends on the efficiency with which the staff FO the company conducts their respective duties on a daily basis.
Various corporate strategies implemented by the company:
Recommendations for implementing ABC model
The various corporate strategies that have been implemented by the company for the purpose of ensuring that the objectives and the goals of the entity are met properly are as follows”:
a). The company has initiated a policy of giving extreme importance to the improvement of the supply chain management and ensuring that the collection from the debtors is concluded in an effective and efficient manner by the company. This resulted in the release of $15.1 million, which was invested in the working capital of the company.
b). The company tried relentlessly to reduce the costs that are incurred by the entity on per live weight kilogram of the produce. The company also been able to charge a higher average selling price in respect of the Wagyu and Shorted. This resulted in the fall in the costs incurred by the company by 27% and the increase in the average selling price of the produce by 12%. Consequently, the margin that is enjoyed by the company has improved significantly (Oseifuah 2018).
c). The efficiency of the operations of the living stone facility of the company improved significantly over the year. The number of heads processed increased by 26%, a 30% increase in the kilogram of beef that is processed and a 305 decrease in the conversion costs that are incurred by the company was recorded.
The ways in which the ABC model can assist the company in achieving its goals:
For the purpose of ensuring the success of the company in the end, the management of the company ensures that the objectives and the goals of the entity are laid down clearly in front of them. The management of every company ensures clear enlisting of the various objectives that are needed to be fulfilled by the entity along with the corporate strategies that will be implemented by it in the near future. ABC model of costing as a management tool provides the management with the adequate information that is required for the purpose of decision making on its part (Mahal and Hossain 2015). For the purpose of ensuring that the costs that are being incurred by the management in respect of the various activities that are being conducted by company, are giving good corresponding returns to the entity, the continuous monitoring of the costs incurred will have to be initiated by the management of the company. In respect of the monitoring of the costs that are, being incurred by the management the utilities that are provided by the ABC model of costing is of utmost necessity.
Another suitable management accounting tool
The ABC model effectively monitors the fixed costs that are being incurred by the entity over the period of time irrespective of the level of production that is conducted by the company. The model also helps the management of the company to ascertain the benefits that have accrued in the favour of the entity corresponding to the costs that are being incurred by the company in respect of the various activities that have been conducted by It (Cannavacciuolo et al. 2015).
Recommendation regarding the implementation of the ABC model:
For the purpose of effective adoption of the model and its integration in the functional areas of the management, the following steps are to be taken up by the management:
- The various functional areas of the company are to be objectively analysed-
- The various activities that are being performed by the functional areas of the company must also be identified.
- For the purpose of allocation of the indirect costs that are, being incurred by the management to the key and significant functional areas of the company the management needs to finds a suitable and appropriate basis of allocation.
- The statement of expenditure and the statement of revenue that is being prepared by the management have to be objectively compared with each other (Cannavacciuolo et al. 2015).
- The management of the company will required to remove certain activities that are being performed by the entity at present for the purpose of increasing the operational efficiency of the entity.
Other management tool suitable for the management:
One of the other significant tools that can be used in place of ABC Model for the purpose of managerial decision-making is the tool of standard costing. Under this method, the management is required to set target performance in respect of every functional area that is present within the entity. The most significant functional areas include the sales that are recognised by the company and the costs that are incurred for the same purpose. After the setting up of the targets, the management needs to be engaged in the actual performance of the various activities (Busse et al.2016). Subsequent to this, the management needs to measure the actual performance with the targets that are being set up by it. After the measurement, a comparison has to be drawn between the actual performance and the targets that were set up by the management of the company prior to the performance of the task by the entity. In case any deviation is found in the performance of the entity, the company ensures that the reasons for the deviation are found out efficiently and the corrective measures are being taken up by it for the purpose of mitigating the reasons for the deviation (Elias and Mehrotra 2018).
Conclusion:
After the conclusion of the above analysis, it can be observed that the ABC model as a method of costing has significantly improved the quality of information that is available with the company for the purpose of decision-making. The continuous monitoring of the costs that are being incurred by the company is made possible by the adoption of the costing model. As the activities that are being performed by the entity are taken up as the basis of the cost allocation the decision regarding the same and the data, pertaining to it is more reliable than the ones provided by other costing tools and methods.
In the present report the advantages, features and other unique characteristics of the ABC Model costing will be highlighted. Subsequent to that, an effort will be made to develop an understanding with respect to the principles with which the entity is conducting its operations.An insight will also be obtained in respect of the mission, vision and the various objectives of the entity (Chouhan et al. 2016).
The company that has been selected for the particular analysis is Australian Agricultural limited. The company has got its listing in the Australian stock exchange
Reference:
Busse, C., Mahlendorf, M.D. and Bode, C., 2016. The ABC for studying the too-much-of-a-good-thing effect: A competitive mediation framework linking antecedents, benefits, and costs. Organizational Research Methods, 19(1), pp.131-153.
Cannavacciuolo, L., Illario, M., Ippolito, A. and Ponsiglione, C., 2015. An activity-based costing approach for detecting inefficiencies of healthcare processes. Business Process Management Journal, 21(1), pp.55-79.
Chouhan, V., Soral, G. and Chandra, B., 2016. Developing an ABC model: a case study of Indian company. Abhigyan, 34(2), pp.66-80.
Elias, H. and Mehrotra, A., 2018. Activity-Based Costing of Library Services in Universities—A Case Study of a Private University. Economics, 6(3), pp.165-176.
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