Importance of ABC Cost Accounting Model for National Tyre & Wheel Limited

This report discusses the importance of ABC cost accounting model for National Tyre & Wheel Limited in achieving its corporate strategies. It explains the features of ABC model and how it can be aligned with the company's goals and strategies. The report provides recommendations for implementation of ABC model and suggests other management accounting tools suitable for the company. The subject is Managerial Accounting and the course code is not mentioned. The report is relevant for students studying accounting, finance, and business management. The college/university is not mentioned.

Managerial Accounting

Executive Summary
The present report is developed for demonstrating the importance of ABC cost
accounting model in gaining success in the present competitive business environment. The
report has enabled and examined the mission, objectives and strategies of National Tyre &
Wheel Limited an ASX listed entity. This is followed by provided an explanation of aligning its
corporate strategies with the ABC model. As a result, it has been concluded that the accurate
identification of the cost involved in the operational processes with the use of ABC costing
enables the management accountants of the company in taking accurate strategic decisions for
the future growth.

Contents
Introduction......................................................................................................................................4
a. ABC and its Features...................................................................................................................4
b. Aligning of ABC Model with the Current Goals & Strategies....................................................5
i. Identification of Company’s Mission & Objective..................................................................5
ii. Identification of Company’s Strategies...................................................................................6
iii. Explanation of ABC Model in Achieving Company Strategies.............................................6
c. Recommendations for Implementation of ABC Model in National Tyre And Wheel Limited
(NTD)..............................................................................................................................................8
d. Suggestion of other Management Accounting Tool Suitable for the Company..........................9
Conclusion.......................................................................................................................................9
References......................................................................................................................................10

Introduction
This report is carried for providing a deep insight into the cost accounting model of
Activity Based Analysis (ABC) and its various features. This has been done through carrying out
an evaluation of the use of ABC model for attaining the corporate strategies of a company listed
on ASX. The company selected in this context is of National Tyre & Wheel Limited (NTD). Also,
the recommendations about the implementation of the model and other management
accounting tool suitable to be applied within the company are discussed in the report.
a. ABC and its Features
For the measurement of the overhead cost, one of the tools which are mostly used by
the companies and business organisations is ABC better known as activity based costing. By
using ABC tool, the business organisations measure the overhead cost as well as the several
other costs which are related to the business operations. The ABC approach is based upon the
cost of the products that is incurred while the companies undertook its business operations
ranging from manufacturing to finishing. Whenever the business organisation carries on with its
production there is a sort of cost which is added in every next step in the total cost of the
production. Therefore, to manage these added cost and the overhead cost; the companies
started taking use of the ABC tool (Wagener, 2008). Another aspect by which activity based
costing can be understood is the financial cost allocation. For achieving higher production and
improved performance with the minimum use of organisational resources and low cost, there is
used ABC tool so that there can be maintained an effective track of the activities and costs
which are related to the product and production. There are various activities in which the ABC
tool is used in the business organisation such as for the development of the products for the
manufacturing of goods for production as well as for identifying the required capital needed for
the manufacturing and production functions (Leitner, 2007).
Activity based costing has a number of features or characteristics that help the
businesses and the companies in the effective calculation of the overhead cost associated with
the final product. There is fixed cost as well as the variable cost which accumulated and

resulted in the overhead cost. The variable cost kept on changing according to the business
operations and the products. When there is any maintenance cost or the repair cost; the cost is
considered as the variable cost. It is also variable in nature because of the quality change as
well as the changing requirements of the customer. On the other hand the fixed cost does not
change and it remains same for all the production and business operations. It comprises of the
cost that is fixed such as the various labour cost, electricity cost, etc. the companies make clear
difference between the fixed cost as well as the various cost in the manufacturing unit. When
the cost is associated with the product then it is based upon the circumstances where the
production takes place as well as the quality of production (Zeuner, 2012). The manufacturing
plants are usually there at different units and because of this there is high level of variance that
occurs in the cost. There are number of challenges and issues that are associated with the cost
and it is essential to understand these issues before the initiation of the production process.
The cost relationship issues have a direct impact upon the budget. These issues are related to
the changing market needs and the customers' orders. Thus, it is essential that before the
actual calculation of the cost there must be identified and analyses the various factors that can
impact the cost. For customer satisfaction as well as for improved production, there is a need
that the production team must prepare a chart for all the activities (Goektuerk, 2007).
ABC tool of accounting is highly vital for the business organisations that deal in manufacturing
because due to the usage of old and traditional methods, there are extended costs that
incurred on final product. The companies use the ABC tool for better decision making and
improving performance by taking efficient use of minimum resources and by calculating the
overhead cost (Kim, 2017).
b. Aligning of ABC Model with the Current Goals & Strategies
i. Identification of Company’s Mission & Objective
National Tyre & Wheel Limited is a tyre and wheel wholesaler company involved in
providing tyres and wheel for passenger cars, light commercial vehicles and caravans. The
company provides its products across Australia & New Zealand. The company is recognized to
meet the tyre replacement needs of thousands of drivers on an annual basis. The company

objective is to achieve positive consumer engagement by providing with high quality tyres
developed with the use of latest generation technology. The mission of the company is to
become a leading brand by development of innovating wheel products having long life, safety
and suitability.
ii. Identification of Company’s Strategies
The company strategy is to rapidly expand is type and wheel product portfolio and
therefore carried out its business operations through subsidiaries and controlled entities. The
different subsidiaries of the company pursue growth strategy and strive to introduce new range
of products for new market segments and driving the customer loyalty with the use of value-
adding services. The company strategy is to develop its wholesaling business for providing tyre
products and driving its continued growth by the development of its subsidiaries and controlled
entities (National Tyre & Wheel Limited, 2018).
iii. Explanation of ABC Model in Achieving Company Strategies
ABC costing model can largely facilitate the company in achievement of its corporate
strategies by its effective strategic positioning. The company is aiming to expand its product
portfolio for driving its continuous growth and creative positive engagement by providing them
high quality products. This can be achieved by the company with the use of ABC costing model
that will help NTD in redesigning of its manufacturing process. ABC costing model will enable
the company to gain a better understanding of real operational costs and returns and thus
supporting the management accountants to take key decisions for improving operational
efficiency. The company can review its products for price adjustment with the use of ABC
costing model that can lead to identification of the opportunities for reducing operational cost
through product redesigning and process improvement. The increase in the operational
efficiency will drive significant reduction improve of products and increasing customer
satisfaction for the company and thus helping it to attain its corporate strategy (Goektuerk,
2007).
NTD for evolving its product portfolio need to price many type of tyre products in
different amounts. Thus, the production of each product will incur varying amount of overhead

and thus making it difficult for the management accountant to allocate the overhead cost on
individual product basis. In this context, the use of ABC model will provide large help to the
management accountants for gaining an accurate estimation of the overhead costs by assigning
them to each product manufactured accurately. This is done by the use of developing cost
pools and cots drivers that helps in allocating the costs as per the overhead resources
consumed in manufacturing process of the company (Kocakula, 2017). Cost drivers are
regarded as the factors that determine the number of activities that will be consumed by a
given product such as machine hours, size or complexity. The cost incurred in carrying out each
activity for the manufacturing of a product can be accurately identified by the management
accountants of the company with the use of ABC costing. The actual cost data relating to the
products manufactured by the company on the basis of volume of production will assist the
management in taking strategic decision regarding the its future growth and expansion plans
(Clifton, 2003).
Thus, the use of ABC costing method largely facilitates the business managers of the
company to take accurate decisions and therefore it act as a strategic management tool. The
decisions relation to elimination of non-value adding products largely helps in improving the
operational efficiency by reduction in the overhead costs consumed by the non-valuable
products. This can help the company in improving its profitability position and supporting its
business strategy of growth and expansion (Ness and Cucuzza, 2005). The strategic decision
regarding the product designs, product mix, marketing and product price all requires actual
product costing data provided with the use of ABC costing model. Therefore, a better
representation of the resources consumed by the activities involved in production of products
helps in accurate allocation of the cost to customers on the basis of activity consumed by them.
This can enable the company in attaining a competitive edge by creating positive customer
engagement through providing them with high quality and low priced products (Kannaiah,
2015). The use of ABC costing model to drive operational efficiency can be depicted as follows:

(Source: https://researchonline.jcu.edu.au/41020/1/41020%20Kannaiah%202015.pdf)
c. Recommendations for Implementation of ABC Model in National Tyre
And Wheel Limited (NTD)
NTD is recommended to adopt the use of following suggestions for successful
implementation of ABC cost accounting system:
 Employees Training: It is essential for ensuring the success achieved with the use of ABC
cost accounting model to provide relevant information about its needs and benefits to
the employees. This is necessary for overcoming the employee resistance to change by
providing them adequate information about the need of ABC system to be implemented
within the work processes. In this context, employees need to provide training to
incorporate the use of ABC costing model in their jobs for providing accurate costing
information to the management for decision-making. This will improve their skills and
knowledge regarding the ABC and also overcoming their hindrance to adopt its usage in
performing their daily job roles. This is essential to redesign the manufacturing process
of the company with the use of ABC costing model to achieve the operational excellence
and driving its profitability (Ness and Cucuzza, 2005).

 Benchmarking: The business managers can implement the ABC costing model in the
manufacturing process of the company by benchmarking each of the business processes
against the standard that they think is the best to be adopted. Thus, it will provide a
direction to the business managers regarding the target to be achieved by the use of
ABC costing model. ABC can drive continuous improvement in the manufacturing
process of the company by identifying the wasteful activities and improving the
operational efficiency. This in turn will facilitate the business manager to achieve the
standard business process that has been determined to be achieved (Kannaiah, 2015).
d. Suggestion of other Management Accounting Tool Suitable for the
Company
The company is also recommended to adopt the use of target costing method in order
to accurately determine the cost involves in production of new products by the company. The
method is efficient to be used for estimating the overall cost of product life cycle in advance
and thus facilitating in making advance plans for price points and margins that the business
manager wants to achieve for new product. The approach is largely beneficial for developing
the cost goals of a new product to be achieved by the company on the basis of market
conditions such as level of competition or switching cost of the customer and many others. It
will enable the company to attain a competitive edge by driving to achieve the determined
profit margin from each product by the use of suitable cost reduction strategies and actions
(Clifton, 2003).
Conclusion
The report concludes that activity based costing model is a highly efficient cost
accounting model that enables the management accountants to collect real time cost
information for taking accurate strategic decisions. The use of ABC cost accounting model can
prove to be highly useful for NTD to realize its growth strategies of business expansion by
targeting new customers segments through creation of new tyre and wheel products.

References
Clifton, B. 2003.
Target Costing: Market Driven Product Design. CRC Press.
Goektuerk, H. 2007.
Activity-Based Costing (ABC) - Advantages and Disadvantages. GRIN Verlag.
Kannaiah, D. 2015. Activity Based Costing (ABC): Is It a Tool for Company to Achieve
Competitive Advantage?
International Journal of Economics and Finance 7(12), pp. 275-281.
Kim, Y. 2017.
Activity Based Costing for Construction Companies. John Wiley & Sons.
Kocakula, M.C. 2017. Activity-Based Costing: Helping Small and Medium-Sized Firms Achieve a
Competitive Edge in the Global Marketplace.
Department of Accounting and Business.
Leitner, A. 2007.
Activity Based Costing. GRIN Verlag.
National Tyre & Wheel Limited. 2018. [Online]. Available at:
http://www.ntaw.com.au/companies [Accessed on: 25 May 2018].
Ness, J. and Cucuzza, T. 2005. Tapping the full potential of ABC. [Online]. Available at:
https://hbr.org/1995/07/tapping-the-full-potential-of-abc [Accessed on: 25 May 2018].
Wagener, D. 2008. Activity-Based costing and its later development into activity based
budgeting and management. GRIN Verlag.
Zeuner, P. 2012.
Activity-Based Costing. GRIN Verlag.