ABC Costing Model for Pacific Energy Limited

This study analyzes the effectiveness of ABC costing model for Pacific Energy Limited, a renowned energy generation company in Australia. It suggests ways to reduce overhead costs and allocate resources effectively. It also discusses the applicability of ABC model in accordance with the goals, strategies, missions, and objectives of Pacific Energy Limited.

Pacific Energy).
ABC Costing Model
Costing model analysis
Name of the Author

Contents
Introduction.................................................................................................................................................1
Activity based costing model-.....................................................................................................................2
ABC model in accordance with the goals, strategies, missions and objectives of Pacific Energy Limited..4
Recommendations-......................................................................................................................................5
Another Management Accounting Tool suitable for the use of Pacific Energy Limited..............................6
Conclusion...................................................................................................................................................7
References-..................................................................................................................................................8

Introduction
With the changes in the economic condition and complex busienss structure, each and
every organization should use proper costing model the recording the costs of the busienss in
different process. If the cost of the production is distributed in different work department the nit
will eventually increases the effectiveness and overall business functioning of organization. ABC
costing is a technique that is basically used for reducing the overhead cost generating from
different operations in an organization. Production process is a very huge process and it involves
a number of activities. There are different resources that are needed to fulfill those activities like
material, labor, electricity, water and so on. So, it is very important to check whether resources
are not properly utilized and there should be an accurate and proper utilization of resources.
Resources involve a cost factor. As the usage of resources increases the cost of the product also
increases simultaneously. ABC costing helps an organization in the proper allocation of
resources and suggests ways to reduce the overall cost of the product. This is a study about a
Pacific Energy Limited that is a very renowned energy generation company in Australia (Pacific
Energy, 2017). This company has gained momentum in market by offering best types of
chemicals to clients throughout the time. Pacific Energy Limited wants to provide products to the
customers that can satisfy their needs. It also wants to get famous all over the world. There are
many organizations that possess very complex operations and it becomes very difficult to
allocate resources as well as cost, so, in such organization this process helps a lot (Alsharari,
2016).
Activity based costing model-
Activity based costing model is a very effective as well as efficient way used by the
organization as it helps in analyzing the deviation of cost in relation to making things easier. This
method helps organization to create a proper analysis on the cost. It majorly tracks all the
activities happening in production process and the resource utilized in the same (Palmer &
Hynard, 2007). By create a proper tracking record, cost incurred and resource involvement can
be identified. ABC model is mainly known for its applicability on manufacturing units but it is
also applicable on the organizations where there is a high complexity of operations (JUSZCZYK
& LEŚNIAK, 2016). Resource allocation is a very important task that is taken care by ABC

costing as there are various organizations in which the increment of cost is related to the wastage
of resources. Resource allocation to an activity directly refers to the allocation of the cost. Cost
directly creates an impact on the revenues of the organization because people can buy products
that are affordable for them (Lim, Noh & Mo, 2016). So it is important for Pacific Energy
Limited to set a low price of the product. ABC costing assists in minimizing the cost of the
product by using the same production technique and with the same quality of the products.
Features of Activity based costing-
ABC costing is a very good method that provides assistance to the organization. There
are certain features that make it different from the other methods and techniques of costing. It
basically focuses in optimum utilization of resources and minimizing the overhead cost of
production.it believes in separating different elements of cost that makes it simpler (Foolmaun &
Ramjeeawon, 2012). It divides cost into two parts- Fixed cost and Variable cost. Fixed cost
means the cost that remains same in every situation. If production process is going or not, but the
fixed cost incurred will be the same. There is no connection of fixed cost with the quantity
produced. On the other hand, Variable cost has a total dependency upon the units produced. It
only depends upon the production activities. If there are no production activities, then there will
be no variable cost. The separation of cost helps an organization to find out different cost drivers.
Cost drivers attract cost and it helps in maintaining a proper record. It also enables an
organization in planning and budgeting of different activities. There are different examples of
fixed cost and variable cost (Jelić, Aničić, Đurović & Radojičić, 2014).
There are several costs of the busienss which has to be paid by Pacific Energy Limited in its
busienss. However, by using the effective cost drivers, company could increase the cost
recording process.
The fixed cost expenses of the company such as depreciation, amortization, interest expenses and
insurance. All these expenses incur irrespective of production process ("Contributions Published
in Strategic Analysis in 2017", 2018).
Variable cost: Commissions, Freight, cost of labor, freight out and direct material. These
expenses incur by production activities only.

ABC model in accordance with the goals, strategies, missions and objectives of Pacific
Energy Limited
Every organization has some mission, vision, goals as well as objective and it works so
hard to achieve the same. It is very important to have goals as there should be clarity in the
organization. Pacific Energy Limited has a very clear mission and vision (Pacific Energy, 2017).
Vision
With its strong technical partnerships with two prominent power generation and electrical
companies in China, Pacific Energy Limited has vision to foothold in the power sector (Pacific
Energy, 2017).
Mission
The mission of Pacific Energy Limited is to attain leadership position in the industry by setting
superior conduct of conduct and organization culture. It wants to be the most highly valued
business by each and every stakeholder, customer and community in which it operates (Pacific
Energy, 2017).
Goals
It wants to create an image that can be expected by each and every person connected to the
company.
Consistent capacity improvement through innovation and development program by using the
advance technologies is the major part to achieve the set goals and objective. By using the ABC
model costing, company could win over the market and bifurcate its costing investment in
different work process accordingly. They aimed at creating strategies department wise and then
ensure that whether the goal has been achieved or not (Pacific Energy, 2017). They communicate
all the goals and strategies to stakeholders so that it can inspire all the stakeholders and then they
can motivate all the employees in a better way. By using the advance technologies and developed
program, company deliver the trainings and learning’s to their employees which promotes
innovation and creation in business. Employees are treated as a very important resource for every

organization. They also help in facing the market competition by analyzing the competitive
ideas. It is important for employees to keep motivated all the time and this is the reason Pacific
Energy Limited creates a lot of efforts in motivating the employees by providing them rewards
and recognition for their hard work. There is a very positive environment for the employees in
the offices of Pacific Energy Limited so that employees do not face any difficulty in doing their
work and can contribute their whole efforts for the growth and success of the organization.
How ABC model assist in achieving the strategies of Pacific Energy Limited?
ABC model is perfectly suitable for Pacific Energy Limited as it can help the organization in
perfectly implementation of strategies in the organization. The main strategy of company is to
consistent capacity improvement through innovation and development program by using the
advance technologies. It can also help the company in the expansion plan and be famous all over
the world (Pacific Energy, 2017).There is different type of expansion strategies that involved costs.
It basically analyses the impact of expansion plan and developing innovation and creation in the
value chain activities of Pacific Energy Limited. Pacific Energy Limited wants to have capacity
improvement through innovation and development in its value chain activities. (Mwakiwa,
2011). ABC costing helps in setting the proper program in determining the costing of the
business and assists in business improvement at large through the innovative and creative
program. It wants to provide the best quality products as well. So, both the things can take place
only when ABC method is used. It also focuses on providing cost effective offers that attracts
customers to buy more products. So majorly, ABC costing eliminates all the extra cost involved
in the production process by allocating the resources more effectively (Wouters, 2012).
Recommendations-
ABC costing is the beast method that can be adopted by Pacific Energy Limited to accomplish
the goals and objectives of the same. It proves to be very helpful for growing organization. It can
also provide assistance to the company in its future expansion plan. It helps in serving the
customers more efficiently and can increase customer satisfaction that can ultimately lead to
brand loyalty. It is one of the simple methods of costing that is very easy to understand and
implement. The main recommendation for Pacific Energy Limitedis related to how well
company could undertake the possible functions to implement the strategic decision. It is

observed that ABC model costing is the main suitable costing model which could be used by the
Pacific Energy Limited to implement the effective decision making. The ABC costing model is
used by Pacific Energy Limited to implement the effective strategic decision making. This
method reduces the costing of the business and increase the overall efficiency of the busienss.
The ABC costing should be used by company when it finds high complexity to manage the
business and lower down the overall costing of the process. However, Pacific Energy Limited
should take proper steps and analytical work program If It wants to set up new costing model in
its business.
Another Management Accounting Tool suitable for the use of Pacific Energy Limited.
As we have discussed, there are many different methods of costing that can be applicable on
Pacific Energy Limited but it has been determined that ABC costing is the best method for the
company. This method can provide each and every feature that Pacific Energy Limited wants for
the future growth and development. If it is not possible to adopt this method due to any reason
then it can also adopt Life Cycle costing method. This method basically deals with the
procurement cost and tries to find out the cheaper way of creating a task. It also calculates the
expected return that the company can get from the investments made. It can also help in the
online side of business (Lim, Noh, & Mo, 2016)
The life cycle costing method is most suitable method for the organization which has high
complexity in the busienss. If these systems are used then it will eventually increases the overall
outcomes and efficient busienss functioning. The life cycle costing method uses the positive and
negative impact of the work process and bifurcate the costing in the different work process.
However, the higher level of initial investment may result to high cost of capital for the busienss.

Conclusion
Here we conclude with the above study that it will be the best option for Pacific Energy
Limited to adopt ABC costing method as it can fulfill all the requirements of the organization
and can help them for future fulfillment of goals and objectives. It can be used to track all the
activities and then do the analysis of cost and resources involved. It also provides measures to
get the products available to the customers on an affordable price. Pacific Energy Limited used
many historical costing methods that are not as beneficial as they do not include the modern
costing techniques. It assists Pacific Energy Limited in optimum utilization of resources and the
growth. Now in the end, it could be inferred that by using the ABC model, Pacific Energy
Limited could increase the overall effectiveness of business and strengthen the costing recording
system.

References-
Alsharari, N. (2016). RESULTS BASED COSTING (RBC) SYSTEM: QUESTIONING THE
UNIT OF ANALYSIS IN ABC. Corporate Ownership and Control, 13(2). doi:
10.22495/cocv13i2c3p8
Contributions Published in Strategic Analysis in 2017. (2018). Strategic Analysis, 42(1), 60-67.
doi: 10.1080/09700161.2017.1418957
Dhillon, B. (2013). Life Cycle Costing. Hoboken: Taylor and Francis.
Foolmaun, R., & Ramjeeawon, T. (2012). Comparative life cycle assessment and life cycle
costing of four disposal scenarios for used polyethylene terephthalate bottles in
Mauritius. Environmental Technology, 33(17), 2007-2018. doi:
10.1080/09593330.2012.655321
Jelić, M., Aničić, J., Đurović, J., & Radojičić, S. (2014). ABC COSTING METHOD. FBIM
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JUSZCZYK, M., & LEŚNIAK, A. (2016). Site Overhead Cost Index Prediction Using RBF
Neural Networks. Destech Transactions On Economics And Management, (icem). doi:
10.12783/dtem/icem2016/4096
Lim, J., Noh, W., & Mo, J. (2016). A Methodological Quality Evaluation of Nursing Cost
Analysis Research based on Activity-based Costing in Korea. The Journal Of The Korea
Contents Association, 16(7), 279-290. doi: 10.5392/jkca.2016.16.07.279
Mwakiwa, E. (2011). Cooperation or competition. [S.l.: s.n.].
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10.1057/palgrave.elmr.1410060
Wouters, M. (2012). Cost management. New York: McGraw-Hill Professional.

Pacific Energy, 2017, Annual report, Retried from
http://www.pacificenergy.com.au/images/files/asx-announcements/2016/2PEAR2016Fin
al.pdf