(PDF) Implementation of the ABC Model in a Company

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ABC Model Implementation in Companies
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1ABC MODEL IMPLEMENTATION OF COMPANIES
Table of Contents
1. Introduction..................................................................................................................................2
2. Alignment of ABC Model...........................................................................................................2
2.1. Mission & Objective of Company........................................................................................4
2.2. Company’s Corporate Strategies..........................................................................................5
2.3. Role of ABC Model in Company.........................................................................................6
3. Implementation of ABC Model...................................................................................................8
4. Suitable management accounting tool suitable for Wesfarmers besides ABC mode..................8
5. Conclusion...................................................................................................................................9
References......................................................................................................................................11

2ABC MODEL IMPLEMENTATION OF COMPANIES
1. Introduction
Activity Based Costing (ABC) is a method of accountancy which determines the
relationship of consumed resources, the product and the cost incurred in the same to recognize
the cost of accurately for each activity (Al-Hroot, Saadaaan and Amireh 2015). In simple words,
this method enhances the costing of the product by providing it more accuracy in comparison to
the traditional techniques. It also provides assistance to the managers in understanding the
allocation as usage of resources in order to help them strategies competitively. It is observed that
various organizations have been prioritizing this method by implementing it so as to gain a
competitive edge by reducing the cost. Moreover, it also provides decision support to the
decision makers when other cost system fail to do the needful.
Wesfarmers is considered to be one of the most valued organizations which is
headquartered in Australia and is listed under Australian Stock Exchange (ASX). With its
enormous business line, Wesfarmers operates in various fields starting from supermarkets, liquor
outlets, hotels to another industry such as chemicals & fertilizers, energy and even coal mining
(Allain and Laurin 2018). Hence, with so many heads of business, Wesfarmers becomes one of
the most diverse companies which could implement activity-based costing and this paper will
identify the gaps which Wesfarmers could fill using the aforementioned costing method.
2. Alignment of ABC Model
Currently, there has been a desire amongst the organizations to understand their cost and
the key influencers of the same. However, a confusion remains with them on how to understand
the costs and differentiation among the various costs which the organization incurs during

3ABC MODEL IMPLEMENTATION OF COMPANIES
various operations (Al-Nuaimi, Mohamed and Alekam 2017). Hence, this makes difficult for the
managers as well as the accountants to keep an accurate track of the costs.
It has been witnessed in a past few years that the activity-based costing method has been
adopted by various firms and is even common among the management accounting techniques. It
is generally used where the organization has diversified range of products as well as various
operations. In such plants, the accuracy of deriving cost is much difficult than that of others. In
such organizations some of the products are under costed while other are over-costed
(Angelopoulos and Pollalis 2017).
With the business environment becoming more competitive with the technological
advancement, the companies try their best to manage their costs. With the traditional methods,
the chances of accuracy were minimal which could be misleading and make decision making
process difficult for managers. Though simple, the traditional method failed to identify the
indirect costs with accuracy. Hence, with the introduction of activity-based cost method, all the
expenses of an organization be it direct or indirect is acquired (Yang and Chang 2018).
Fig-1: Activity Based Costing Model

4ABC MODEL IMPLEMENTATION OF COMPANIES
2.1. Mission & Objective of Company
Wesfarmers, being a conglomerate, deals with various business lines in Australian and
New Zealand majorly. The company aims towards being best at ethical practices within the its
business operations and to its stakeholders. Being a reputed firm, it has a mission to enhance its
standards to both of its stakeholders and customers (Arora and Raju 2017). Other than
maintaining high standard of ethics in the organization, the company also aims to ensure
satisfactory returns to its investors and wealth maximization of its stakeholders. The organization
has also reflected its responsibility towards environmental and social development. Moreover, it
also aims towards the development of the economy and its major contribution in the same.
Financially, the company’s primary objective is to provide the shareholders with true and
fair value of the firm for which the organization is looking forward to improve the culture of the
workplace. This corporate structure is aimed to be implemented throughout the various branches
of the organization be it within or outside the national boundaries. High level of information as
well as transparency is again within the objectives of Wesfarmers (Oseifuah 2018). Even the
employees of the organization are instructed to strictly follow the business ethics during
execution of their duty.
The company tries to maintain the best product quality so as to keep their customer
satisfied and even ensures that the customer gets the correct information about any Wesfarmers
product they use. The primary objective of the company also includes the its sustainable
development along with that of the society. It has moreover aimed to invest towards
technological advancements in order to remain competitive as well as allocate their resources
successfully. The company believes in value creation and brand upliftment which is possible
through creation of wealth while keeping its ethical norms intact. Hence, they have developed

5ABC MODEL IMPLEMENTATION OF COMPANIES
several CSR strategies which includes the well being of all the stakeholders (Smith, Burt and
Gentile 2017).
2.2. Company’s Corporate Strategies
The company’s core strategy is to provide the shareholders with satisfactory returns or in
other words maximizing their value. The organization’s core values revolve around integrity,
openness, accountability as well as boldness. The company acts ethically towards every dealings
as well as transactions made. It also keeps its transparency while reporting the financial
statements and even take feedback and ideas seriously. Accepting the mistakes made and
learning from the same is within its values. Wesfarmers own the accountability of any decisions
made and work towards enhancing its performance to protect its reputation (Dale and Plunkett
2017).
Wesfarmers believe in providing autonomy to its business operations so that the
particular unit may operate efficiently. They do not remain within some rigid strategy and
implements plans as needed. The first growth enabler of the organization is hiring the unique
talent and utilizing them towards the most critical works so as to strive while being sustainable.
It recognizes the abilities of its employees (Tsai et al. 2015). The company also work towards
promoting the commercial capability throughout the leadership base. Hence, it ensures the any
decision made by the company is backed by capable financial discipline. Moreover. they
constantly work towards enhancing their corporate culture and encourages innovation as well as
creativity. The organization maintains high level of social responsibility and they do same with
their balance sheet in order to remain competitive in their costing and always store capital for
any opportunities which might be a tool for value creation (Lueg and Morratz 2017).

6ABC MODEL IMPLEMENTATION OF COMPANIES
The group’s strategies to gain its objectives is to strengthen the operational excellence in
the current business and carter to the needs of the customers. It also encourages the
entrepreneurial initiatives with secure growth and even ensure stability. Moreover, the
organization also renews it portfolio by injecting value-added transaction into its operations.
Fig-2: Wesfarmers Corporate Strategy
2.3. Role of ABC Model in Company
A better understanding of cost could be essential for creating an effective strategy for the
corporation. As ABC model refines the costing, it also keeps track of individual objects which
incurs cost for the organization. As per the common belief, the accountants think that inventory
cost will provide all the cost but it does not, so ABC method provides the true cost (Arora and
Raju 2017). The core benefit of this method is that it allocates the indirect cost to calculate the
total expenses. In the traditional method, the direct cost is traced to the main product but the

7ABC MODEL IMPLEMENTATION OF COMPANIES
manufacturing overhead is not traced although and is allocated towards the product. Hence, the
inability to trace the actual cost, there remains an error. In simple words the new method actually
traces the costs directly at the product and finds exact cost which is helpful as well as reliable in
making decisions.
This method of costing could help the organization from wasting its resources on the
activities which does not add any value and assist the managers to identify the profitable
projects. The cost accounting system mainly satisfies three goals which includes allocation of
various costs so as to create the financial statement, providing information to cost managers and
providing cost estimates.
However, in Wesfarmers the activity-based costing could reflect its various other
functions as this company is into diversified fields (Manyaeva, Piskunov and Fomin 2016). Such
functions could be satisfaction of customers by enhancing the pricing system and even limit the
price-cutting to keep it profitable parallelly. It can also help the management to identify the most
profitable goods and those which are unprofitable. In this the company could organize its
strategy as per the goods and the target market. The activity-based costing could also help the
organization to manage their inventory efficiently and achieve better turnover rate through
proper valuation of the same. Wesfarmers could also make their various processes and
departments efficient when they have a better understanding of cost of operating those processes.
It may even help in differentiating the cost of production from that of idleness and finally to
assimilate effectively with the financial accounts (Neto et al. 2018).

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3. Implementation of ABC Model
Implementing the ABC model in Wesfarmers would need adequate support from the top
management of the company. As this model is to be implemented, it is necessary to be included
in core values. The whole costing process is needed to be changed and the department
responsible for working in the same are needed to be trained to acquire this method. Hence, it is
important that the structure of the company to absorb the ABC design (Öker and Adıgüzel 2016).
Therefore, it is needed to be implemented throughout the cross-functional team rather than one
particular accounting department. This is possible if the organization forms a special team
comprised of people from each and every department from various business operations so as to
train them to use the date that is generated from activity-based costing model. This team would
be comprised of the representative from every business operation’s various departments. Hence,
a consultant for the same is needed to be hired to take advice from.
The reason for which Wesfarmers should support the implement the same is because the
managers needs reflect resistant towards any change without the lack of leadership from senior
management. Moreover, without proper support, the significance of ABC model might detriment
in eyes of the subordinate (Chouhan, Soral and Chandra 2017). Hence, it can be recommended
that management of Wesfarmers should understand their cost accounting system implement the
method and involve cross-functional teams to allocate the cost in each department of every
business operations. Hence, it would be helpful for the organization towards using the model for
the preparation of eternal financial reports.
4. Suitable management accounting tool suitable for Wesfarmers besides ABC mode
Another tool that could be effective for the management accounting of Wesfarmers is
budgetary control. This tool is of significance because of its contribution towards planning and

9ABC MODEL IMPLEMENTATION OF COMPANIES
controlling of various activities at different organizational levels (Angelopoulos 2017). It has
been observed that managers estimate their budgets very seriously as it will help them to
determine the actual position of the organizations cost levels and will assist them in taking
important decision. There are various benefits which Wesfarmers could derive through
implementation of budgetary control such as:
 The management of Wesfarmers could assimilate the labors of various personnel in the
company towards the organizational goal. This method will synchronize all the activities
performed by the organization and push it towards achievement of common objectives
(Chouhan, Soral and Chandra 2017).
 It can help the management of Wesfarmers to identify the expenses of each department in
every business operations and if any department spotted to have exceed the estimated
budget then special action should be taken by the management towards the same.
 This system will also provide Wesfarmers with the knowledge to set the budget from its
prior experience by scrutinizing the success or failure of budgets in the past. It could help
in curbing the error and providing a proper information that could be formulated in the
present or future budget estimates.
5. Conclusion
Evaluating the article above could help in identifying the assistance provided by ABC
model in differentiating the cost in two main categories of fixed and variable so as to provide a
quality information in order to design a cost-effective system in the organization. Wesfarmers
has an aim of maintaining a competitive edge over its rivals while maintain the ethical standards.
Hence, ABC model hold a significance in identifying the less income generating department or
operations and take necessary steps to manage the same. Moreover, another management tool

10ABC MODEL IMPLEMENTATION OF COMPANIES
which the company could implement is budgetary control as it helps the management to
recognize actual budget’s variances. Therefore, counteractive actions could be implemented to
curb the errors in the external reports.

11ABC MODEL IMPLEMENTATION OF COMPANIES
References
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Costing on Companies Financial Performance: A Study among Jordanian Industrial
Shareholding Companies. Analysis, 7(35).
Allain, E. and Laurin, C., 2018. Explaining implementation difficulties associated with activity-
based costing through system uses. Journal of Applied Accounting Research, (just-accepted),
pp.00-00.
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Performance. International Review of Management and Marketing, 7(1).
Angelopoulos, M. and Pollalis, Y., 2017. Activity Based Costing (ABC) as a tool for Lean
Transformation: The Case of the Greek Power Public Corporation (PPC).
Angelopoulos, M. 2017. Using ABC costing method with in a KPI-based framework to a Lean
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Dale, B.G. and Plunkett, J.J., 2017. Quality costing. Routledge.

12ABC MODEL IMPLEMENTATION OF COMPANIES
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