Management Accounting Report on Activity Based Costing (ABC) Model

This report discusses the Activity Based Costing (ABC) model and its implementation in Australian farms. It explains the purpose of two research studies and their findings on ABC. The similarities and differences in the findings are also discussed, along with four specific outcomes or lessons learned from the research that will be useful for management accountants in Australian companies. The subject is management accounting, and the course code and college/university are not mentioned.

Running head: MANAGEMENT ACCOUNTING REPORT 1
Management Accounting Report
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Word Count: 3,166

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TABLE OF CONTENTS
CHAPTER PAGE NUMBER
Executive Summary.........................................................................................................................................................3
Introduction....................................................................................................................................................................3
Explanation of Activity Based Costing (ABC) Model.......................................................................................................4
The purpose of the two studies and what research questions they set out to explore about Activity Based Costing
(ABC) model....................................................................................................................................................................5
Similarities and Differences in the findings of the two studies......................................................................................8
a. Similarities……………………………………………………………………………………………………………………………………..…..8
b. Differences…………………………………………………………………………………………………………..……………………………..9
Four (4) specific outcomes or lessons learned from the two studies' research
Findings that will be useful for management accountants in Australian Companies to learn from............................10
Conclusion.....................................................................................................................................................................12
References.....................................................................................................................................................................14
Executive summary

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Activity Based Costing (ABC) is considered an essential model of costing and cost control
that is useful in any manufacturing organization. It is always important for organizations to
consider adopting practices of managerial accounting that are best suited to their specific
strategic goals and objectives. Research has indicated that systems of accounting are not
uniformly applicable to all companies, due to their varying range of operational activities that
are performed by various organizations. The main focus of this paper is on two articles with
regard to Activity Based Costing (ABC) model, which is used by many organizations that
understand the value and importance of accurate and proper allocation of overheads or
indirect costs. The results from the findings of these two research studies have been used by
management accountants in Australian companies in understanding the discussed costing
model.
Introduction
The main purpose of this paper is to discuss two research-based journal articles relating
to Activity Based Costing (ABC). These two articles discussed are “Implementation of the
Activity based Costing Model for a Farm: An Australian Case” and “The Impact of Activity based
Costing on Organizational Performance”. The paper explains the Activity Based Costing (ABC)
method and discusses the purpose of the two studies as well as what research questions they
set out to explore about the topic. Additionally, the similarities and differences in the findings
of the two studies are also discussed in this paper, as well as four specific outcomes or lessons
learned from the research findings of the two studies that will be useful for management
accountants in Australian companies to learn from.

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Explanation of Activity Based Costing (ABC) Model
Activity based Costing (ABC) method is an approach of managerial accounting which
identifies costs of overheads of activities and then allocates such costs to objects. Activity based
Costing (ABC) method can be explained in other words as a way of allocating or assigning
indirect costs of overheads to the various departments or products within an organization,
which helps it in generating the costs during the processes of production (Zopounidis, 2008).
The main focus of Activity based Costing (ABC) method is to identify activities or processes of
production, which are in processing a job. Such individual job activities are then placed together
into groups having processes that are similar, and into a pool of costs relating to a single cost
driver of activities. These pools of costs are then evaluated, analyzed and allocated
predetermined rate of overhead which is later assigned to all individual products and jobs. As
already discussed, Activity based Costing (ABC) method is process that involves multiple steps.
However, it is a much more accurate method or approach of allocating indirect costs to
products and departments, in a proper manner (Mallouk, 2009).
Activity based Costing (ABC) method assists managerial accountants in allocating
overhead expenses to products and jobs based upon the amount or number of activities
needed for producing the specific products, rather than simply getting an estimate of the
amount used by each job (Roos & S.-A, 2011). Assignment or allocation of indirect costs in a
proper and accurate way is very essential for management, especially in cases where the firm is
experiencing downsizes or it is outsourcing certain services. This is because departments which
are highly profitable can be allocated indirect costs, thus making them be viewed as

MANAGEMENT ACCOUNTING REPORT 5
unprofitable from a theoretical or paperwork view. Furthermore, based upon specific
evaluations, a firm’s management can choose not to continue carrying out some operations and
shut down a profitable department or branch due to improper and incorrect distribution of
costs (Tudor, 2017). This leads to compounding of the problems since upon closure of the
departments or braches which are profitable, the ones left are those which are unprofitable.
Closing the branch firm which was profitable causes the firm to be unable to cover or settle its
fixed costs. In addition to this, outsourcing is significantly affected by improper allocation of
indirect costs. For instance, the management of a firm may consider outsourcing as a cheaper
option due to improper and inaccurate allocation of costs. In such cases, outsourcing may be
actually be significantly expensive (Selto & Groot, 2013).
There are three ways in which Activity based Costing (ABC) method improves the
process of costing. For instance, it increases the number of pools of costs which can be utilized
for assembling costs of overheads. This is done by pooling costs by activities, rather than
grouping al costs in one pool (Needles, Powers & Crosson, 2008). Activity based Costing (ABC)
method also assigns costs of overheads to products in a manner that the costs are assigned
based upon the activities which generated them, rather than upon measures of volumes.
Finally, Activity based Costing (ABC) method changes the nature of various costs which are
indirect. This makes costs which were previously termed as indirect, including depreciation,
identifiable to certain activities (Lucey, 2009).
The Purpose of the Two Studies and What Research Question(s) They Set Out To Explore
About Activity Based Costing (ABC) Method

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a. The research Study “Implementation of the Activity based Costing Model for a Farm:
An Australian Case”
This research is primarily purposed for developing an understanding on how the model
of activity based Costing (ABC) can be implemented in farms. The research is also aimed at
examining issues that are related to implementation of the Activity Based Costing (ABC) model
in farms. Technical factors are considered critical in implementing the Activity Based Costing
(ABC) model in farms. Because of its unique nature, the agricultural production faces significant
challenges regarding costing of the products (Selto, & Groot, 2013). This is considered a huge
challenge, particularly for managers in farms as well as other organizations that deal with
production of agricultural products. This research, is therefore, designed to examine how
Activity Based Costing (ABC) model can be implemented successfully for the benefit of
managerial accountants and managers in such farms and agricultural-related organizations
(Lambert & Lambert, 2012).
This research sets out various questions about Activity Based Costing (ABC) model. For
instance, it answers the question as to whether Activity Based Costing (ABC) model has the
ability to apply cost drivers that are not driven by volume, and disentangle costs of resources
into two-stage process of the cost allocation, with a view to addressing the problems and issues
faced in costing the agricultural products produced by farms and other organizations dealing
with agriculture. In addition to this, the research is sets out to explore challenges that are faced
by such farms and organizations in implementing this Activity Based Costing (ABC) model
(Jones, 2014).

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b. The Research Study “The Impact of Activity based Costing on Organizational
Performance”
This study is mainly purposed for determination of the impacts of Activity Based Costing
(ABC) on performance of an organization based on a contingency perspective. It is specified by
the contingency theory of managerial accounting that there is no one control system of
accounting that can be applied to all organizations in an equal manner (Mallouk, 2009). Each
organizations experiences an environment of operation that varies significantly from other
organizations, and must evaluate it carefully using a strategic process of planning. Sin
accordance with the contingency theory, management of an organization must ensure that the
structure and strategy fits or conforms to the environment that exists, in order to enhance its
performance. According to the Institute of management Accountants, systems of cost control
are implemented for incorporating and supporting an organization’s overall strategic objectives,
which are aimed at improving its performance. This study, therefore, was conducted to
investigate Activity Based Costing (ABC) I determining its impacts on the performance of an
organization (Lambert, Griffith, Recorded Books LLC & Gildan Media Corporation, 2014).
This research study has a research question that its sets out to answer in its findings. For
instance, it is based on the research question as to whether Activity Based Costing (ABC) Model
improves performance of an organization (Selto, & Groot, 2013). In this regard, the study
attempts to research how Activity Based Costing (ABC) model enhances performance of
organizations, which often operate in competitive and complex environments. most
organizations use the traditional methods of accounting, that have numerous shortcomings as

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they do not provide them with strategic and useful information for making key decisions in
their present environments. As there is a great need for the management of such organizations
to acquire quick, reliable, accurate and relevant information for making sound decisions in their
businesses, this research study designs innovative tools of managerial accounting that can be
used for such purposes through strategic processes of management (Hartley, 2014).
Similarities and Differences in the Findings of the Two Studies
a. Similarities
The findings of the two research studies postulate that systems of management
accounting and cist control such as Activity Based Costing (ABC) Model are very significant in
any organization, as these determine how well the organization operates, thus enhancing its
financial performance. The two research studies are based on the fact that organizations face
various challenges in their operational environments, which affects them significantly in their
daily operations in regard to cost control (Gitman, Juchau, Flanagan & Zutter, 2010).
The findings of the two research studies are also similar in that they highly encourage
and recommend organizations to implement and use Activity Based Costing (ABC) Model as a
key system of cost control. For instance, the research “Implementation of the Activity based
Costing Model for a Farm: An Australian Case” recommends Activity Based Costing (ABC) Model
as an approach that can be embraced for solving costing challenges of agricultural products.
Similarly, the research study “The Impact of Activity based Costing on Organizational

MANAGEMENT ACCOUNTING REPORT 9
Performance” significantly advocates for use of Activity Based Costing (ABC) Model in improving
and enhancing performance of an organization (Mallouk, 2009).
Furthermore, the results of the two research studies are aimed at providing important
lessons to managerial and cost accountants as well as management of a firm regarding the
benefits of adopting Activity Based Costing (ABC) Model, its associated implementation
challenges and how it can improve and simplify allocation of overhead costs to processes, jobs
and departments within the organization. This is very important in picturing out the need for
implementation of this model as the primary cost control system in organizations, for helping in
monitoring and evaluation of overhead costs (Fortes, 2011).
b. Differences
There are various differences in the findings of the two research studies. For instance,
the findings of the research study “Implementation of the Activity based Costing Model for a
Farm: An Australian Case” are specifically meant for use by farms or any other organization that
deals with production of agricultural products. On the other hand, the research findings of the
research study “The Impact of Activity based Costing on Organizational Performance” are
meant for use by all organizations in general, which are involved in production of any product
that requires some costing (Collins, 2011).
Additionally, findings of the research study “Implementation of the Activity based
Costing Model for a Farm: An Australian Case” are majored on implementation of an Activity
Based Costing (ABC) Model of cost control, and challenges that are associated with its

MANAGEMENT ACCOUNTING REPORT 10
implementation. In this research, technical issues including data availability and limited access
to resources or scarcity are outlined as the primary factors influencing implementation of
Activity Based Costing (ABC) Model of costing for farms and agricultural based organizations
(Mallouk, 2009). On the other hand, the findings of the research study “The Impact of Activity
based Costing on Organizational Performance” focus mainly on how Activity Based Costing
(ABC) Model impacts performance of organizations in general. In this research study, it has
been found out that organizations that use this costing model are most likely to experience
reduced costs, which results into improved organizational performance (FINKLER, 2017).
Four (4) Specific Outcomes or Lessons Learned From the Two Studies’ Research Findings That
Will Be Useful For Management Accountants in Australian Companies to Learn From
There are two lessons learned from the research study “Implementation of the Activity
based Costing Model for a Farm: An Australian Case” that can be used by management
accountants in Australian companies (Seal, 2015).
i. For instance, the study helps management accountants in gaining an understanding
regarding development of an ABC costing model that covers all operating costs with
an exception to direct materials. In doing this, the management accountants need to
consider identifying the various pools of activities that are necessary for the model
of costing (Mancini, Vaassen & Dameri, 2013). With regard to agricultural
organizations such as farms, these activity pools may include pruning, picking,
packaging, potting, bunching, collection and loading of buckets, planting, watering,

MANAGEMENT ACCOUNTING REPORT 11
weeding, application of fertilizers, spray of chemicals and planting plastic covers
(Mallouk, 2009).
ii. In addition to this, the research findings assist managerial accountants in gaining an
understanding of the various issues and challenges that may be faced during
implementation of this ABC costing model. For instance, technical problems such as
limited resources and data availability are considered the major challenges. In the
course of developing this costing model, managerial accountants can use various
heuristics in order to enable its implementation, because of limited data availability
(Selto, & Groot, 2013). For instance, volumes of sales can be used widely for
allocating costs of activities in cases where volume could not be measured using
other alternative approaches. However, managerial accountants also learn that,
although these heuristics can be used in implementing the Activity Based Costing
(ABC) model, they are associated with various negative effects on its reliability of
cost information generated (Bhatti & Khan, 2008).
According to the findings of the research study “The Impact of Activity based Costing on
Organizational Performance”, managerial accountants can draw important lessons which can
help them in their cost management roles (Weygandt, Kimmel & Kieso, 2018).
i. For instance, the findings in this research can help managerial accountants in
analyzing how financial information from publicly reported financial statements
can be utilized in evaluation of changes in performance of organization, resulting
from its implementation of Activity Based Costing (ABC) model (Ramsden, 2010).

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The results of this study have demonstrated how organizational performance
can be evaluated using several financial measures such as earnings per share
(EPS), market price, Return on Investment, debt to equity, turnover of assets,
return on stockholder’s equity and operating performance. The results indicate
that these measures are significantly used by management accountants in
determining how third parties such as creditors, lenders and investors are
interested in and analyze the overall financial performance of an organization
(Bhattacharyya, 2012).
ii. In addition to this, the results of this research study are useful to management
accountants in determining factors which might affect or influence the decision
of an organization or firm whether or not to implement Activity Based Costing
(ABC) model. The findings of this research outline that although many
organizations have been using traditional methods of cost accounting, these
methods are recommended for making key decisions, as they do not give
sufficient and reliable information on costing (Olive, 2012). The results from this
research highly recommends management accountants to abandon these
traditional methods of cost accounting which are considered outdated and
obsolete, and adopt the model of Activity Based Costing (ABC) which is regarded
more useful in decision making than the former (Agrawal, 2010).
Conclusion

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As discussed above, Activity Based Costing (ABC) model is an approach of managerial
accounting which identifies costs of overheads of activities and then allocates such costs to
objects. Activity based Costing (ABC) method can be explained in other words as a way of
allocating or assigning indirect costs of overheads to the various departments or products
within an organization, which helps it in generating the costs during the process of production.
The findings of the two research articles discussed above are very useful to management
accountants of Australian companies in understanding the benefits of adopting this costing
model, and abandoning the traditional method which is outdated and improper for key decision
making. For instance, the results of the two research studies help accountants in determining
factors which might affect or influence the decision of an organization or firm whether or not to
implement Activity Based Costing (ABC) model. Additionally, the research findings are useful to
managerial accountants in analyzing how financial information from publicly reported financial
statements can be utilized in evaluation of changes in performance of organization, resulting
from its implementation of Activity Based Costing (ABC) model.

MANAGEMENT ACCOUNTING REPORT 14
References
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Bhattacharyya, A. K. (2012). Financial accounting for business managers. New Delhi: PHI
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