Applicability of Activity Based Costing System to Aristocrat Leisure Limited

This report evaluates the ABC model and its applicability to the Aristocrat Leisure Limited. It recommends the implementation of ABC costing system to monitor and control activities consuming costs in the firm.

HI5017 Managerial Accounting
Holmes Institute
Trimester 1 2018
Individual Assignment
Student Name
Date

Executive Summary
This report was prepared at the request of the CEO of Aristocrat Leisure limited. It aims at
evaluating the ABC model and its applicability to the Aristocrat limited. Being a firm that
heavily depends in innovation and technological environment as a tool to gain competitive
advantage, Aristocrat incur huge overhead costs that cannot accommodate the use if
traditional costing system. Its therefore recommended that the firm put in place ABC costing
system. This will also assist the firm monitor and control activities consuming costs in the
firm.

Table of Contents
Table of Contents.......................................................................................................................3
Introduction...............................................................................................................................4
Definition and features of ABC...................................................................................................4
Suitability of ABC to the goals and strategies of Aristocrat Leisure Limited.............................5
Mission and objectives of Aristocrat Leisure Limited............................................................5
Aristocrat Leisure Limited Corporate strategies....................................................................6
Suitability of the ABC costing system to the missions, objectives and strategies of
Aristocrat Leisure Limited.......................................................................................................6
Recommendations.....................................................................................................................7
Additional management accounting tool suitable for Aristocrat Leisure limited.....................7
Conclusion..................................................................................................................................8
References..................................................................................................................................9

Introduction
As an employee of Horllison management consultancy I was tasked with preparing a report
to the CEO of Aristocrat Leisure Limited explaining the role of ABC costing system and its
suitability to the firm. The popularity of the system in the manufacturing sector has caught
the eyes of the CEO and he has thus developed an interest in the system. In this report
therefore all highlight the objectives, mission and strategies of Aristocrat Leisure limited.
Furthermore, all give a preview of the ABC and conclude by analysing the suitability of the
model to Aristocrat Leisure Limited.
Definition and features of ABC
The ABC costing system is a system that assigns overhead manufacturing costs to the
activities that were carried out during the production process. Afterwards the activity costs
are summed to obtain the total product cost. Activity based costing relies on the notion
that the production process consumes activities while the activities consume resources.
The use of Activity based costing allows the management of the firm to allocate the indirect
costs in a more logical manner than the use of the traditional costing system. In the
traditional system costs are simply allocated using one single base for instance machine
hours or the direct labour hours. The ABC system first assigned costs to the activities which
took place in the manufacturing process before assigning the cost to the items based on the
proportion of activity consumed (Patramanis).
Let’s take an example of a firm producing two items M and W. Product M is a low volume
product which needs special activities such as machine set ups, special engineering and
additional testing since its demanded in small portions. On the other hand, products W is a
high-volume product whose production runs continuously. This product though demands
minimal attention with no forms of special activities. In case a firm allocates overheads using
the traditional costing system let’s say using machine hours, then little costs will be
allocated to M while most of the costs will be assigned to W since it consumes a lot of
machine hours (Qian and Ben-Arieh). This system fails to consider the costs consumed by M
through the special engineering, several set ups as well as the additional testing. On the
other hand, product W failed to consume the other activities yet still allocated heavy costs.

The results of this system will be inaccurate estimation of the costs of both product M and
W.
The activity-based costing system is advantageous as it assists overcome such a shortcoming
through allocating costs to all the activities that were consumed in the production process.
The machine set ups, special engineering and testings carried out in producing M will be
assigned overhead costs hence when estimating W all the costs will be considered (Schulze,
Seuring, and Ewering).
Application of the ABC costing system is gaining popularity among the manufacturing firms
as the business environment evolved. Some of the reasons for this is the massive increase in
the manufacturing overheads that have been introduced by the use of technology in
production. Also, the manufacturing overheads are continuously growing independent of
the productive machine hours and direct labour making generalisation of all the bases to
one wider one more inaccurate. Finally, the increase in product and consumer diversity and
the manufacturing of products in different batches have necessitated the introduction of a
costing system that is flexible and can accommodate the scenarios (Seuring, The product-
relationship-matrix as framework for strategic supply chain design based on operations
theory).
Suitability of ABC to the goals and strategies of Aristocrat Leisure Limited
Mission and objectives of Aristocrat Leisure Limited
Having over 50 years of industry experience and over 2000 employees across the globe,
Aristocrat has established its Australian market leadership and reputation as one of the
premium supplier of ground-breaking technologies and services in the international gaming
sector. The company enjoys a reputation of excellence performance with a strong brand
equity in over 200 jurisdictions internationally. The company offer a wide range of products
and services ranging from electronic gaming machines to complete games like electronic
tables, ancillary equipment and services.
The company operates under a clear vision of targeting to become a leader in provision of
gaming solutions, focus, creativity and imagination. For this to be attained then the firm
must invest massively in creativity and innovation.

The company has a strong commitment to associate positively with other industry players,
government and the regulators to maintain core values of integrity and respect for all the
stakeholders under the company’s business environment.
The firm has offices in the USA, New Zealand, Australia, UK, Sweden, South Africa, Argentina
and Macau. All the company staffs are dedicated to meeting the consumer needs at all
levels. With the company’s global management structure its able to promote innovation
across its areas of operation (Finance TV Pty Ltd).
Aristocrat Leisure Limited Corporate strategies
Having been on the verge of collapsing in 2009 when the firm reported an annual loss of $
157.8 million, the firm have since revolutionised and is on the success track once again. The
company focuses on the high value participation gaming segment in the US through
development of compelling game contents. In addition, the firm focuses of technology
tailored to local markets needs in its innovation of advance and trendy brands.
These strategies have been at the forefront of the firm’s success story. The synergy of “out
with the old and in with the new” have been the driving force behind the firm’s innovative
competitive advantage that has seen it enter and concur new markets across the world
(CAFFREY).
Suitability of the ABC costing system to the missions, objectives and strategies of Aristocrat
Leisure Limited
Aristocrat Leisure limited relies heavily on innovation and technological advancement to
gain competitive advantage and improve its market share. This is a capital-intensive
business environment that makes use of automatic machines and computer monitored
operations rather than depend on direct labour hours. With the reduction in the labour
costs overheads such as inspection labour, quality control, testing, procurement and quality
assurance are going up (Seuring).
This increase in the overhead costs is accompanied by complexities when it comes to
allocating the costs to a given product being that occasionally the overheads are shared by
two or more products/services. Traditional costing system relied in machine hours or the
direct labour hours as a wider base for allocating the overheads. When the overheads were
minimal the error would be small and could be ignored. In the new advanced business

environment overheads are the major components of products’ costs hence the firm cannot
afford to allocate them erroneously (Singer and Donoso). The industry is too competitive to
compete when the costing system does not go in hand with the business corporate
strategies.
These developments call for the Aristocrat to implement and make use of the Activity based
costing system. The loopholes in the traditional costing system are too serious for the
company to incorporate the system (Tsai, Lai and Tseng). The use of activity based have
been approved by several researchers to offer the best alternative costing system. By
stressing on the activities as the cost driver, the firm will be able to mitigate the advance
environment with ease as costing is made easier once the cost base and driver are
identified. With proper product cisting the firm is assured of price accuracy which go hand in
hand with estimating profitability as well as implementing strategies that will see
improvements (Voss, Tsikriktsis and Frohlich).
Recommendations
Having analysed the mission, objectives and the strategies of the Aristocrat Leisure limited
in addition to the features of the BC costing system, I would recommend the management
of the firm to consider implementing the use of the ABC in the company. The costing system
will assist the company improve the accuracy of the pricing system. This will give the
managers a chance to make intelligent strategic decisions that are in line with the projected
profitability. To make this success the firm should:
 Put in place a data collection system that will store a record of all the activities taking
place during production of an item.
 Reorganise its internal structure to allow tracing of the activities to departments and
subsections of the firm, this way the costs incurred in each department can be easily
estimated.
Additional management accounting tool suitable for Aristocrat Leisure limited
On top of considering the implementation of the ABC costing system the Aristocrat Leisure
should also put in place a balance scorecard model. This a management performance tool
that makes use of semi standard structured reports to monitor the activity execution by the
company’ s employees. By putting it in place the managers of Aristocrat will be able to

measure performance and take corrective measures where necessary. Some basic features
of the BSC includes:
 Focuses on the strategic agenda of the organization.
 Measures performance using a small sample data.
 Monitors both the non-financial as well as the financial aspects of the firm
Integrating the use of the BSC will be a massive improvement to the performance of the
Aristocrat’s managers. By using the tool, the management will be availed a wide view of the
future financial viability of the firm through the evaluation of the areas vital to the firm’s
competitiveness. This include offering the managers a chance to monitor the firm on four
major perspectives: financial, internal business processes, consumer and technical know-
how.
Applying the use of the BSC will assist the company overcome limitations that arise when
the traditional performance measurement s tools are applied. The traditional system of
evaluating performance only stressed on the financial aspects of the firm thereby ignoring
some other areas which are also vital to the future success of the firm. As a firm that relies
on advancement of technology to propagate effective service delivery, having a system that
looks at the future is the best way to propel its success. The use of BSC is thereby a perfect
match to the Aristocrat Leisure Limited.
Conclusion
The pricing of products and services plays a major role in designing the success of a business
strategy. This calls for accuracy in the costing process. The use of traditional costing system
cannot fit in the advanced business environment of Aristocrat which is characterized by
massive technological involvement. The huge overhead costs that arise from the use of
technology to promote the operations of Aristocrat demand the use of a modern costing
system. With this the company can do better by putting in place the Activity Based Costing
system.
The managers of Aristocrat by putting in place ABC costing will not only estimate costs more
accurately but also get a better tool of monitoring activities and minimizing the production
expenses.

References
CAFFREY, DAN. Aristocrat Leisure Limited Hits the Jackpot. 28 May 2018. Online. 28 May
2018.
Finance TV Pty Ltd. ARISTOCRAT. 28 May 2018. online. 28 May 2018.
Patramanis, E. Supply Chain strategies and their contribution to the competitiveness of
business organizations. The importance of partnerships. Master Thesis. Patras:
Hellenic Open University, 2012. Document.
Qian, L., and D Ben-Arieh. “Parametric cost estimation based on activity-based costing: a
case study for design and development of rotational parts.” International Journal of
Production Economics (2008): 805–818. Document.
Schulze, M., Seuring, S., and C., Ewering. “Applying activity-based costing in a supply chain
environment.” International Journal Production Economics (2012): 716–725.
Document.
Seuring, S. “Assessing the rigor of case study research in supply chain management, Supply
Chain Management.” An International Journal (2008): 128-137. Document.
—. “The product-relationship-matrix as framework for strategic supply chain design based
on operations theory.” International Journal of Production Economics (2009).
Document.
Singer, M., and P. Donoso. “Empirical validation of an activity-based optimization system.”
International Journal of Production Economics (2008): 335-345. Document.
Tsai, W. H.,, et al. “Embedding management discretionary power into an ABC model for a
joint products mix decision.” International Journal of Production Economics (2008):
210–220. Document.
Voss, C.,, N., Tsikriktsis and M. Frohlich. “Case research in operationsmanagement,.”
International Journal of Operations & Production Management (2002): 195–219.
Document.