ABC Costing Method for Operational Efficiency: A Case Study of Harvey Norman

Accounting for Managers
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Executive Summary
The present report has provided an insight into the usefulness of ABC costing method for
businesses to drive their operational efficiency. The use of ABC model can help the Harvey
Norman, an ASX listed entity to drive its operational efficiency by allocating the overhead cots
on the basis of activity and cost driver. In addition to this, the company is also recommended to
adopt the use of standard costing method for identifying the cause of variances in its direct cost
incurred in the manufacturing process.
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Contents
Introduction.................................................................................................................................................4
ABC Model & Its Features............................................................................................................................4
Meaning and purpose..............................................................................................................................4
Features of activity based costing...........................................................................................................5
Aligning of ABC Model with the Current Goals & Strategies of Harvey Norman.........................................6
Company’s Mission & Objectives.............................................................................................................6
Company’s Corporate Strategies.............................................................................................................6
Use of ABC Model in Achieving Company’s Strategies............................................................................7
Recommendations for the Implementation of ABC Model in Harvey Norman............................................8
Suggestion of Other Management Accounting Tool....................................................................................8
Conclusion...................................................................................................................................................9
References.................................................................................................................................................10
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Introduction
Activity based costing has got attention during the last few decades as traditional costing
method does not provide efficient cost allocation of overhead costs. Activity based costing
allocates overhead costs on the basis of the resource utilization by each activity. On the other
hand traditional costing method allocate costs simply taking machine hours as cost base that give
rise to certain issues in calculating exact cost consumed by each product.
In this report, activity base costing model and its features are discussed in detail to
provide how ABC costing works and helps the cost manager in allocating overhead cost in most
appropriate manner. The application of ABC model in Harvey Norman has also been explained
in detail and also one other costing model has been provided other than ABC model that can be
applied in Harvey Norman.
ABC Model & Its Features
Meaning and purpose
Activity based costing (ABC) is a costing methodology used by business organizations for
identifying the costs incurred in production of their products and services as per the actual
resources consumed by them. This is done by identifying the number of activities involved in
manufacturing of a product or delivering a service and then allocating the costs of each activity
as per the resources consumed. The model assigns the indirect costs incurred in manufacturing of
products or services into direct costs and helps in realization of actual accounting data to track
the costs of final outputs produced by a firm. Thus, the model of ABC adopts the use of
assigning the resources to the activities and activities to the cost objects on the basis of
consumption of resources. The cost objects helps in determining the final costs involved in
manufacturing process of a firm by adopting the use of cost drivers that are the factors impacting
the cost of each activity (Christiansen and Bryan, 2014).
Management accountants are increasingly adopting the use of ABC costing method for
gathering real accounting data and thus taking important decisions for maximizing the
operational efficiency. Activity base costing (ABC) allocate all the indirect cost to the main
product cost in more logical manner as compared to traditional approach. Traditional costing
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