Overview of Managerial Accounting and its impact on companies
There are different aspects that determine the success of the business organizations; and the accounting and financial aspects are considered as crucial among them. It is the responsibility of the managements of the business organizations to continue their accounting and financial reporting related operations in the most perfect manner. In this context, it needs to be mentioned that there is a relation between the accounting operations of the companies with the aspect of Managerial Accounting (Hilton and Platt 2013). Managerial accounting or management accounting is considered as different accounting techniques that the managements of the companies use for the success of the business organizations. In a more elaborated manner, the tools and techniques of managerial accounting provide the managers with the opportunity to manage as well as use the accounting information of the companies so that they can get major assistance at the time of organizational decision-making (Noreen, Brewer and Garrison 2014).
Thus, it can be said that managerial accounting has major positive influence on the performance f the companies. Now, it has been mentioned earlier that managerial accounting provides the organizational managers with different techniques that can be used in using the accounting information for better decision-making. One of such crucial managerial accounting technique is Activity-Based Budgeting, commonly known as ABB. ABB can be regarded as a method of budgeting process for the managements of the companies in order to bring greater transparency into the processes of budgeting. One major aspect that differentiates ABB with the traditional budgeting system is that it involves in the direct allocation of revenues from institutional and research activities to the units in the most responsible manner (Weygandt, Kimmel and Kieso 2015). The main objective of this report can be seen in the analysis and evaluation of different dimensions of ABB so that its suitability can be determined in a major Australian company, CSR Limited.
CSR Limited is one of the major companies in Australian that has been providing building products for the purpose of both commercial and residential solutions. It needs to be mentioned in this context that CSR Limited has its business operations spread in the regions of Australia and New Zealand (Csr.com.au 2018). As the company has spread its operations in the regions of these counters, a huge customer base can be seen in the company and CSR Limited has more than 12,000 customers across the regions of Australian and New Zealand. CSR Limited has different types of clients or customers as the company provides building material solutions to different aspects (Csr.com.au 2018). They are discussed below.
Activity-Based Budgeting (ABB)
CSR Limited provides building solution to the residents of contemporary homes and for this reason, the residents of contemporary homes or the detached homes are one major type of customer of the company. It needs to be mentioned that the company provides these customers with build solutions for performance and aesthetics for the purpose of modern living. The company provides them with customized solution in order to cater to their needs. After that, the residents of apartments and multi-residential buildings are another major type of client of CSR Limited. These clients of CSR Limited are the people of the urban areas of Australia. CSR Limited has to cater to their need for apartment building due to the huge growth in the population (Csr.com.au 2018).
In addition, CSR Limited provides building solutions for the commercial as well as retail purposes. For this reason, the owners of the commercial as well as retail businesses are another major type of customer of the company. Hence, new as well as old business owners are the clients of the company as they always look for spaces for commercial and retail businesses. It needs to be mentioned that CSR Limited provides building solution to the civil authority for the smooth transport facilities like interruption free transport facilities for trucks and trains. For this reason, the civil authority or the government is another major client of the company (Csr.com.au 2018).
It can also be seen that CSR Limited involves in developing health, education and public buildings. Thus, the major clients of the company from these sectors are different healthcares like hospitals, nursing homes and others, schools, colleges, operas, shopping malls, stadiums and others. Lastly, the owners of offsite and prefabricated buildings are another type of clients of CSR Limited. The owners of these buildings can be normal people, businessmen, professionals and others. Thus, the above discussion indicates towards the fact that CSR Limited has been able in serving a huge and diversified client base with their unique and quality building solutions (Csr.com.au 2018).
As per the earlier discussion, there are some major differences between ABB and the traditional budgeting system. It needs to be mentioned that ABB has some unique features that differentiate it with the traditional budgeting system. The following discussion provides the description of ABB along with its key features.
ABB can be defined as a planning system that associates various organizational costs with the activities and budgeted expenditures with the aim to compile them on the basis of the of the expected activity level. For this reason, difference of ABB can be seen with the traditional budgeting system that involves in the adjustment of existing cost levels for inflation and major changes in revenue. Thus, the description of ABB can be provided as a budgeting technique that is based on activity framework with the use of cost driver data in the setting of budget and process for variance feedback. It implies that the use of cost drivers can be seen in ABB in the process of deriving budgets. It can be observed from the name of ABB that the main focus area of ABB is the cost activities rather than cost functions (Mohammadipour 2014).
CSR Limited Background
The presence of three main stages can be seen in the process of ABB. The first process involves in the identification of the major cost activities of the businesses along with their cost drivers. The second stage in ABB involves in forecasting the number of units of the cost drivers and it is done for the required level of cost activity. The third or last stage in the process of ABB is the calculation of the rate of cost drivers. It is done based on the cost per unit of the cost activities. In addition, it needs to be mentioned that like activity-based costing, ABB helps in drawing attention towards the overhead activities along with their cost associated. ABB signifies that the managers can control the activity costs with the help of controlling the activity volume in the organizations (Pazarceviren, Akcin and Ozsuer 2015).
The presence of some specific features can be seen in ABB and these features differentiate ABB from the traditional budgeting system. These features are discussed below:
- More realistic in nature is one major feature of ABB. In the organizations, different processes of ABB assist the managers in looking inward at different activities as well as costs as it does not only depend on the line items for the budget (Reka, Stefan and Daniel 2014).
- Another major feature of ABB is the development of more accurate financial budgets for the companies as compared to the traditional costing system. it is possible for ABB to provide the managers with more accurate as well as flawless budget as it considers all the cost drivers along with cost activities (Hoozée and Hansen 2017).
- Another major feature of ABB is that it helps the organizations in making the most effective use of the resources due to the fact that ABB provides the companies with the accurate budget for the specific accounting period (Pazarceviren and Celayir 2014).
- One major feature of ABB is that it helps the organizational managers in the reduction of wasteful spending with the help of analyzing each cost activity along with its contribution towards the success of the organization. It also indicates that ABB helps in the identification of the costing activities that do not contribute towards the organizational success so that they can be eliminated (Hoozée and Hansen 2017).
- Another major feature of ABB is the change in the process of the counting of organizational costs. ABB involves in the counting of costs on the basis of costing activities along with the cost drivers that assists in providing more details of the costs (Hope and Fraser 2013).
- Another major feature of ABB is that it provides the organizational managers with the opportunity to make alignment of the organizational strategic plan with the budgeting system. In the presence of a clear and accurate budget, managers become able in achieving the strategic objective in a more accurate manner (Hoozée and Hansen 2017).
- One major feature of ABB is that it provides the organizational managers with more flexibility in the process of the reallocation of funds compares to the traditional budgeting system (Bogsnes 2016).
- As ABB can be aligned with the organizational strategic plan, another major feature of ABB can be found in the process to set performance targets for the higher level management and other employees (Hoozée and Hansen 2017).
Activity based budgeting (ABB) is the process of budgeting constructed for bestowing higher level of clarity into the procedure of budgeting of a firm. The fundamental structure of activity based budgeting shows that the revenue produced from operating instructions and research based functionalities, is to be assigned to that particular unit which is responsible for the activity.
The distinctive differences between activity based budgeting and traditional budgeting, is discussed below:
- Tools for budgeting balance:
Generally, in the traditional process of budgeting, a firm would prefer to utilise the data that has been recorded over a period of twelve months and financial documents involving the activity plan. Thus, in order to prepare a new budget for a period, it could be done by either rising or reducing the by adjusting the cost for making forecasts or to satisfy other needs of the firm (Menzies et al. 2018). This enables the firm to hardly fulfil the balance in budgeting by taking necessary steps related to product, services and resource capabilities.
On the other hand, in case of activity based budgeting, the firm could accomplish running budget balance before preparing financial budget by focusing on the size of product or services, current resource capability of the firm, the resource and activity driver rate and so on.
- Allotment on indirect costs:
The traditional budgeting process brings volatility in the cost related to the working hours of the labourers. It results from alternative options related to different types of factors instead of just allotments. It is would be unrealistic if the firm only takes into account the history of costs related to the cost drivers only.
Differences between ABB and Traditional Budgeting Systems
However, ABB tries to find out the cost drivers by following the basic steps of accounting in order to administer the indirect costs. This would help the firm in reducing the range of the allotments regarding indirect costs and analysis of the increase in the criteria related to the allotments (Cicchetti et al. 2016).
- Merchandise pricing:
In the traditional process of budgeting the costs related to the production of expensive finished products get overestimated, moreover, this results in the undervaluation of the earnings and vice versa; when the firm is functioning under a contract.
In case of ABB the individuals responsible for proper functioning of different units of the production process would be able cut down the extra costs, so that the earnings of the firm would increase. If the monetary value of the costs get reduced and profit level of the products get increased, then the clients could agree with this decision, then the firm would be able to produce in a suitable ratio and take of the labour hours related to the production of the merchandised products (Walling et al. 2016).
- Resource consumption:
In the process of traditional budgeting, the budget procedure involves cost of average build up of a firm. This process of budgeting includes direct costs related to staff, labour, factory overhead and periodic expenses. However, this process fails to highlight all the resource consumption points (Rosas et al. 2018).
On the other hand, ABB is the process that involves a clear analysis of all the activities, resource consumption points and estimations could be properly carried out. This procedure helps the firm in assigning the required resources to the suitable units and functionalities are crystal clear, that diminishes the occurrence of mistakes.
- Organisational approach:
The traditional budgeting process involves a straight forward organisational approach. However, ABB allows the firm to take a step by step or hierarchical approach which diminishes the gap between the different units functioning within the firm. It also helps in proper utilisation of value concentric for the firm (Ohemeng 2016).
- Analysis of budgetary indicators:
The traditional budgeting process helps in analysing the budgetary indicators elated to the organisational approach.
Where as, ABB would be able to organise the budgetary indicators related to the activity of individual units based on the features of their respective activities and also the responsibility that requires to be carried out by each unit. Thus, that limited resources could be utilised diplomatically (Martin et al. 2014).
- Fixed and variable costs:
The acute competition prevailing in the market makes the firm to focus on the variable costs. In the process of traditional budgeting the costs get segregated into fixed costs and variable costs respectively. The firm needs to organise the accounts related to variable costs and take care of the unyielding fixed costs.
Features of Activity-Based Budgeting (ABB)
However, the process of ABB puts emphasis on the long term method of tallying. It points out that major sections of the costs are variable and this process tries to analyse the forces which would make all the overhead costs to change over time (Lewis and O’Riain 2017).
Other valid points related to the comparison between ABB and traditional budgeting shows that- traditional budgeting process involves over dependence on the budget that has been prepared in the previous year. This could be an unrealistic approach as the firm might face unwanted consequences at times. If the budget constructed in the previous year by the firm is not correct then the same mistakes would be spotted in the budget in the current year and also in the future as well. If these mistakes are continued then the firm could suffer from lack of growth in the future.
On the other hand, the process of ABB involves the in depth understanding of all the functional areas of the firm. If the manager who has been given the responsibility of preparing the budget is not aware of all the functional areas of the business then the firm would be suffering from wrong evaluation of the business and it would lead to the preparation of an inaccurate budget (Kulp and Heymann 2015).
There are different parts involved with ABB, it would enable CSR limited in accomplishing a running budget balance as well as a financial budget balance individually (Kandler, Honold and Wimmer 2015). When the manager of CSR limited who is responsible for the preparation of the budget would be able to construct a running budget progressively, followed up by the preparation of financial budget based depending on the adversities faced during the preparation of the operating running budget balance. The focus point of CSR limited in utilising ABB would be depending on working out a budget that would be constructed in a straight forward way in order to coordinate with the activities and resources and it includes non-financial cost drivers as well. This would help in clearly examining the inefficient and unbalanced resource inconstancies. This would benefit CSR limited in assigning resources in a better way, it would also help in bringing down costs, assist in decisions related to pricing and gaining vital data for utilisation of the value concentric related to the resources (Ilham, Nurdin and Tsuji 2018).
The process of ABB helps in taking the decisions regarding the activities based on directing the firm in, this case CSR limited. ABB links strategy with budget and disposes of the deficiency of strategic soundness, it provides budgetary control and proper mapping of the strategies made by the directors of the firm (Sampalis et al. 2018). The strategic direction provided by the ABB is a sequence based on activities and value related to operating process. It would help CSR limited in pointing out the trend of market demand, the process price expansion and after sales services provided to the customers. The firm would gain more net earnings by properly allocating the resources, utilising the coordinated strategic mapping and bringing price expansion in order to fulfil the conditions of immaculate utilisation of ABB. The labour and direction process of CSR limited would depend on ABB, as it would point out the position of the digits which the firm needs to accomplish each month on an annual basis. It would help them in understanding and executing the figures constructed in it in a diplomatic way, it would encourage the employees in working with more passion, in order to earn more profit for CSR limited.
Conclusion
Hence, ABB would enable CSR limited in making it possible to carry out the constructed strategy. Under ABB process, there is a budget ready for each activity, therefore, when the budgeted strategy is being utilised every employee would know how much output they need to generate during the specified time (Howell and Cheyne 2018). At the same time ABB would help CSR limited in following the strategies on a daily basis for fulfilling the goals of the firm.
Conclusion:
The current study focuses on the study of CSR limited and its budgetary system. The firm wants to know whether activity based budgeting (ABB) is suitable for them or not. The first part of the study has discussed the relevant points regarding CSR limited. The second part highlights the features of ABB which is vital for the managers, executives and directors of the firm. The next part of this study shows the comparison between ABB and traditional budgeting and it is found that the former is a better choice in the current state of competition prevailing in the market. Finally, the last part of the study focuses on discussing the suitability of this process in CSR limited and it is found that incorporation of this process would enable the firm in earning more revenue in the long run.
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