ABC Costing: Implementation, Merits, Demerits and Evaluation

This report discusses the implementation of ABC costing, its merits and demerits, and evaluates the extent to which it should be considered beneficial over traditional costing. The report includes a case study of TESCO company and covers topics such as cost drivers, cost pools, and cost buckets. The report also highlights the advantages and disadvantages of ABC costing and traditional costing methods. The subject is strategic management accounting and the course code is TOP18288 BMP5006.

BMP5006

Table of Contents
INTRODUCTION ..........................................................................................................................3
TASK...............................................................................................................................................3
1. How it is implemented ABC costing......................................................................................3
2. Merits and demerits of business using Activity based costing...............................................4
3. Evaluate the extent that ABC costing should be considered as beneficial in preference to
traditional based costing .............................................................................................................6
CONCLUSION ...............................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Strategic management accounting is the technique and evaluate of financial data of the
management and its rivals. Management accounting is also know as strategic management
accounting and helps the management to providing useful information to making important
decision. The decision are used by the internal management (Defourny and et.al, 2019). This
report includes the analysis of ABC costing of TESCO company. Further this report includes
merits and demerits of ABC costing. It also includes the critical analysis of the ABC costing over
the traditional costing technique.
TASK
1. How it is implemented ABC costing
ABC costing is powerful technique that is used to evaluate, assign costs, describe and
report on agency operations. It determines the true cost of product or service and identifies
opportunities to business process effectiveness and efficiency. It is cost accounting tool used to
decrease roundabout and upward costs for workers and development of product. With the help of
these costing, organisation may differentiate activities within the company and allocate the cost
to each project. It is used of resources in according to activity based. It creates the relationship
between the activity and cost object by track the flow of activities. The following stages are to be
followed to implement of ABC costing (Duran and Afonso, 2020).
1. Evaluate the various activities within the company- In the traditional overhead system the
number of cost centres are quite small such as fifteen. But in these costing the number of
activities are more than in compare to traditional method. The number of activities is
depended on the organisation activities. The company can divided the activities into the
small number. The activities that are performed in organisation such as customer liaison,
acquiring, schedule product changes, maintenance and handling of material.
2. The activities are related with the overheads, both help and primary, which caused them.
It develop cost buckets and cost pools.
3. The primary activities on some suitable base support activities are then spread. It
evaluates how the support activity are utilised. When manufacturing various items, they
will understand the difference in process that should be captured. In the primary stage it
represents the activity which goes into product creation and organisation service.

2. Merits and demerits of business using Activity based costing
It is costing tool that is identified the different activities which are performed in the
company and allocated the cost of each activity. It determines the cot of every service and
product. The main objective of these costing on allocate the overhead expenses into the
manufacturing expenses that may not seen in the traditional approach of costing. The new
approach of costing objective more on the main headings and direct costs (Goh and et.al, 2022).
The key objectives of ABC costing are as follow:
1. After calculated cost of every activity, then company may easily evaluate that service or
product organisation is not making profit and company should stop ineffectively
activities and focused to the effective productivity of the company.
2. The main aim of these activity is to evaluate the correct cost of every activity and
evaluates the price of the product is correct or not.
3. It also evaluates the differentiating costs such as variable, overhead and fixed cost.
Advantages of activity based costing:
Like all mobile- based, bookkeeping strategies, has some advantages and disadvantage.
They are as follow:
 It reduces arbitrary cost allocation with the help of accurate product costing.
 It is simplest path to assign overhead in the product or service.
 It supports to evaluate the activities that may be eliminated.
 It provides the better information to the management for decision making.
 With the help of ABC costing management can identify the value added and non value
added activities (McCreary and et.al, 2018).
 Shared costs and waste can be reduced by assembly and business cycle.
 Further enhance activity can be segmented or waived with the help of Id significant fees
and low self esteem exercises.
 The activities that are performed in separate head, it creates heading of all the activities
and products.
 The process of costing is very helpful in big organisation to find out mirror errors.
 The accuracy of the project is expended by making evaluation, increase revenue and
choices more reasonable.
 For a better understanding explicit data on cost drivers allow generic creation costs.

Disadvantages
 It find out the costs of every activity that are happened in the organisation. It is very time
consuming and costly project for organisation.
 It evaluates the cost of every activity and after that it analysed it all the activity, so that
the cost of theses activities are more than traditional method (Mericli and et.al, 2020).
 In the financial report all the activities are not written in the paper form, so many time it
is not possible to evaluate the cost of each activity hat are happening in the company.
To assemble in the business, the activity based costing is very helpful because it
evaluates the upward costs that are very big part of the creation cost. If company come what may
managed to browse the abstract of an enterprise that utilised cellular-primarily based costing,
organisation is probably amazed to peer it loaded with undyed names. Mechanized presentations
and punctiliously controlled improvements may decrease direct fees, inclusive of jobs, even as
expanding detour charges, which includes machine and software assist and maintenance, as a
way to upward push.
Pastime-based totally costing is especially essential in organizations that produce made-
to-order materials; custom materials usually require more high-priced unrefined additives, that
are covered in variable charges, however likewise may also require unique or superior authoring
system to method said natural substances, that can not be completely pondered within the
thinking body of this natural substance. As the scope of automation and activity frames
maintains to go into the meeting enterprise, the expense of support, maintenance and utilities will
become even more critical whilst looking to separate mission costs (Mohd Safeiee and et.al,
2019).
Small business and activity based costing:
Activity-primarily based costing may also be ridiculous helpful for private agencies just
beginning out and looking to recognize costs. Impartial businesses rarely battle to keep up with
growing fees at some point of their foundational improvement and foundational phase. With
activity based totally costing, companies can dedicate energy to describing sports which could
growth fees, that can cause higher know-how of fees and greater correct undertaking critiques.
Similarly, for a stand-alone enterprise, the complexity of the series is greatly decreased, as there
are regularly cost scaling sporting events that want to be considered. Commonly, the benefits of
ABC can outweigh the demerits.

In the ABC costing the following formula is to be used:
= Total cost in pool / cost driver
The actual cost of the product is identified with the help of cost pool method, cost of the activity
change by the cost driver (Nabelsi and Plouffe, 2019).
3. Evaluate the extent that ABC costing should be considered as beneficial in preference to
traditional based costing
` There are two method to allocating indirect costs to product such as activity based costing
and traditional costing. Both techniques evaluate the costs of overhead related to manufacturing
and after allocated these expenses to service based on a driver cost rate. There are two methods
such as accuracy and complexity. This occurs most usually when direct work debts to a
important portion of the venture cost. Supporting the speculation of a individual payment driver
is that the spending driving force chooses the increment because the upward increment, and
similarly research makes greater sense than that (Nik Mohd Kamil and et.al, 2019). Every
technology has its merits and demerits. Those are the advantages of getting used to generation:
Traditional ABC
Assigned of overhead cost User of single driver Various cost drivers
Better usage This situation comes when
direct wages becomes a big
part of the service cost
The biggest part of the product
cost is technology forms.
Orientation Driven Cost Driven process
1. All meeting fees are authorized materials, work or better, and assigned to the task
whether or not they are advent-pushed or advent-driven.
2. All meeting prices are involved an fundamental part of the mission value, although non
production charges are not taken into consideration advent expenses and are not covered
inside the project, regardless of whether or not the value is task established. As an
example, device for taking and processing customer orders are essential due to the fact
gadgets are alleged to be scheduled, however the cost of specific items are not allocated
to their costs.

3. The only one method for upward fee pool and a separate scale for moves including direct
work hours, that modify habituation techniques and is much less highly-priced to hold up.
The predetermined charge of ascent relies upon on the predicted price of the volume of
the deliberate movement. As such, the price of upward push for single tasks is solid,
however the upward thrust may had been finished or underneath-applied (Popat and et.al,
2018).
Both techniques have some merits and demerits. The most advantages of the ABC framework is
provide the best value on the manufacturing cost items, but the summary of financial data is not
shown.
Benefits and demerits of creating an interest-based costing system for allocating overhead
ABC frameworks assign prices more exactly based totally on the specific property used
to manufacture a undertaking, they are greater costly to apply and are usually no longer the high-
quality method. Boards do not want to forget every framework and how it is going to paintings in
its very own affiliation. Finding out among traditional or activity-based costing is not always
smooth. Company preference need to depend upon the reason of the reporting and the facts.
Managers prefers the activity costing method because it wants to evaluate the accurate cost of the
product. Even though this device is greater high priced, it offers higher statistics in order to
permit managers to make more profitable choices in the long-time period (Zamrud and et.al,
2019).
The main differences between activity based costing and traditional costing method:
Activity based costing – it focuses on cost drivers that increases cost of activity led to accurate
price discovery . It is helpful for manager to reduce or eliminate non value adding activities more
accurately. ABC enables effective operating cost to allocate overheads efficiently through which
management will use continuous improvement and scorecards technique, helps in product
improvement , customer profitability and overall performance management. ABC is more
accurate than traditional costing, it also increases book keeping cost , so managers must decide
whether it is beneficial for organization to record or analyse all transactions.
Traditional costing – It is the share of factory overhead to products based on volume of
production resources used-up. In this method , overhead is usually applied based on amount of
consumed direct labour hours or utilization of machine hours. The only problem with traditional
costing is that factory overhead affected easily with midget change in volume of resources

exhausted triggers a massive change in the amount of overhead applied. Which will be a
common issue in highly automated environment. This type of costing requires less cost and
favourable for single or double product line items along with small firms.
CONCLUSION
From the above report, it has been concluded that the Tesco company used activity based
company for the future growth and taking best decision of the company. It supports in maximise
of the margin of profit and better understanding of the ABC technique. It is very helpful to the
company with multiple product. Unit level activities, batch level activities, product level
activities and facility level activities are the categories of activities that help to determine the
type of activity cost driver required. Key elements of ABB are type of activity to be performed
and cost of work to be performed.

REFERENCES
Books and Journals
Defourny and et.al, 2019. National costs and resource requirements of external beam
radiotherapy: A time-driven activity-based costing model from the ESTRO-HERO
project. Radiotherapy and Oncology, 138. pp.187-194.
Duran, O. and Afonso, P.S.L.P., 2020. An activity based costing decision model for life cycle
economic assessment in spare parts logistic management. International Journal of
Production Economics, 222. p.107499.
Goh and et.al, 2022. A Time-Driven Activity-Based Costing Analysis of Simultaneous Versus
Staged Bilateral Total Hip Arthroplasty and Total Knee Arthroplasty. The Journal of
Arthroplasty, 37(8). pp.S742-S747.
McCreary and et.al, 2018. Time-driven activity-based costing in fracture care: Is this a more
accurate way to prepare for alternative payment models?. Journal of orthopaedic
trauma, 32(7). pp.344-348.
Mericli and et.al, 2020. Time-driven activity-based costing to model cost utility of enhanced
recovery after surgery pathways in microvascular breast reconstruction. Journal of the
American College of Surgeons, 230(5). pp.784-794.
Mohd Safeiee and et.al, 2019. "The application of time-driven activity based costing system on
inductors in electrics and electronics industry." In Proceedings of the International
Manufacturing Engineering Conference & The Asia Pacific Conference on Manufacturing
Systems. pp. 88-95. Springer, Singapore, 2019.
Nabelsi, V. and Plouffe, V., 2019. Breast cancer treatment pathway improvement using time‐
driven activity‐based costing. The International Journal of Health Planning and
Management, 34(4). pp.e1736-e1746.
Nik Mohd Kamil and et.al, 2019, August. Analysis of magnetic component manufacturing cost
through the application of time-driven activity-based costing. In Proceedings of the
International Manufacturing Engineering Conference & The Asia Pacific Conference on
Manufacturing Systems (pp. 74-80). Springer, Singapore.
Popat and et.al, 2018. Using time-driven activity-based costing to model the costs of various
process-improvement strategies in acute pain management. Journal of Healthcare
Management, 63(4). pp.e76-e85.
Zamrud and et.al, 2019, August. The impact of capacity cost rate and time equation of time-
driven activity-based costing (TDABC) on electric component. In Proceedings of the
International Manufacturing Engineering Conference & The Asia Pacific Conference on
Manufacturing Systems (pp. 81-87). Springer, Singapore.