Activity-Based Costing: A Case Study of MYOB Group

This assignment analyzes the impact of Activity-Based Costing (ABC) on MYOB Group, an Australian company providing business POS, CRM websites, and tax services. It explores the features of ABC costing, its alignment with MYOB's corporate goals and strategies, and the benefits of implementing ABC for the company. The paper also discusses alternative management cost tools and concludes with the importance of ABC in streamlining activities and achieving organizational objectives.

Activity-Based Costing
MYOB GROUP

Executive Summary:
ABC costing or in other words ‘Activity Based Costing’ is a type of accounting method that
includes all the activities that a company performs and assigns indirect cost to them based on the
importance of various activities. Historically, ABC costing was based on two popular concepts:
George Staubus Activity Costing and Input-Output Accounting. For the very first time, it was
developed in 1970’s and 1980’s in the United States. ABC costing deals with three important
parameters: cost, activities and products and evaluate how change in one affects the other. ABC
concept differs from traditional method in the way it assigns indirect cost to the process and the
products. Indirect costs refer to the cost which cannot be directly measured. For example: Salary
of the workforce. For the same reason, it has found important in various industries especially
those dealing with many indirect costs such as manufacturing sector. The ultimate aim of ABC
costing is to convert all indirect costs to direct one and have an idea which activity costs how
much. This would help to identity the co-relation between cost incurred and profit gained from
each activity of the process. In this assignment, we analyze the impact of ABC costing on
MYOB Group. MYOB is an Australian company that provides business POS, CRM websites,
tax etc. We have broken various cost incurred by the company and rank them on how they
generate profit from those activities.
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Contents
Executive Summary:........................................................................................................................2
Introduction:....................................................................................................................................4
ABC Model and its features:...........................................................................................................5
Alignment of corporate goals and strategies with ABC model.......................................................6
MYOB Group Mission and Objectives...........................................................................................6
MYOB Group Corporate Strategies................................................................................................7
Assistance of ABC model in achieving MYOB Group’s Strategies:..............................................7
Recommendation for implementation of ABC model:....................................................................8
Alternative Management Cost tool for MYOB group.....................................................................8
Conclusion:......................................................................................................................................9
References:......................................................................................................................................9
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Introduction:
ABC costing has found its highest prevalence in manufacturing sector as it shows how reliable
the cost data provided and further classifying them. Primarily, the ABC costing is based on
activities which could be any of the following: an event, a unit of work or a complete task itself
depending upon what we are analyzing. Activity based costing was widespread benefits. Some of
the prominent ones are: costing of the target, costing of the product, profitability analysis of the
product line, customer profitability analysis, pricing of the server etc.
Let’s look at how ABC costing works: Suppose A, B, C and D are four activities involved in
production of a product X. A consumes 10% of the total cost, B and C consumes 20% of the total
cost while D consumes 50% of the total cost. While on the other hand, A gives 40% of the profit
and D gives only 15% of the total profit. Here, we can infer that we are spending too much on D
and need to work on same (Amrik, 2011).
Let us talk about the company before jumping impact of ABC costing on the company. MYOB
group was established in year 1991 with headquarters at Glen Waverly, Victoria. It primarily
deals with Accounting Software.
ABC Model and its features:
In a business, what ABC costing does it is to assign cost to all the resources of the company
through the products and services of the company and decide profitability from the same based
on the processes involved.
The objectives of ABC costing are:
 Identification and elimination of those product/services that is unprofitable to the company.
 Lower the price the final products that came out to be overpriced as result of analysis.
 Re-design the production process to get a better yield by re-allocating and re-distributing
various resources.
Under ABC costing, there are two types of activities measures. In other words, how do we
measure involved activities? The first one is ‘transaction driver’ which means how many times
an activity has occurred, for example in manufacturing if a container is filled 100 times, then
transaction driver in such case is 100. The second one is ‘duration driver’ which means how long
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a particular activity lasts, for example if filling of container takes 10 hours, then duration driver
here is 10.
Now the most basic question is how ABC activity differs from traditional approach, traditional
approach deals only with volume or quantity while ABC divides the on five levels, they are:
1. Batch-Level Activity
2. Unit-Level Activity
3. Customer-Level Activity
4. Organizational-Sustainability Activity
5. Product-Level Activity
This is done by segregating cost on three- types, they are
 Fixed Costs- The cost that does not vary with number of units
 Variable Costs- The cost that changes with units produced
 Overhead Costs- The extra expenses occurred such as maintenance cost etc.
 Now let us try to understand how ABC costing actually works:
 Identify Costs: The very first involved is to know all the costs that are involved in any
process
 Load Secondary Cost Pool: These include those costs that are indirectly involved in
process.
 Load Primary Cost Pool: This includes cost of those activities that are directly visible or
has direct impact on the process.
 Measure Activity Drivers: Use appropriate data collection method to collect information
about various drivers.
 Allocate Costs in Secondary Cost to Primary Cost: It means to transfer ‘Secondary Cost
pool’ to ‘Primary Cost Pool’ i.e. to have all the costs in measurable form.
 Charge Costs to Cost Objects: Use an activity driver to allocate the contents of each
primary cost pool to cost objects.
 Formulate Reports: Convert all the analysis in a report format which could be used
further for actions
 Act on the Information: This is the most crucial step where senior management needs to
get involved re-allocation and re-vamping of resources and processes.
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Although ABC costing benefits in various ways, some of the important ones are: to know the
margins we are dealing with, to make a decision to buy or not to buy, to know minimum cost of
final product, to know our profitability status. Clearly there are many benefits of ABC costing; it
is how we take advantage of those for our company.
Like any other process, there are certain limitations associated with ABC costing. The biggest
one being the cost involved in first time implementation of the process. The time taken for
installation is also a big limitation. Another main is it various from process to process, so it
cannot be standardized (Binshan, 2001).
Alignment of corporate goals and strategies with ABC model:
MYOB Group Mission and Objectives:
The mission and objectives of the company states what it wants to achieve, it talks about long
term goals of an organization. The primary objective of the company is to keep itself updated
with all online practices and trends. It looks forward to provide its client with unmatched
services in terms of standards and quality with keeping in mind to get better day-by-day. It has
single objective to combine skill, talent and technology giving growth and success to all their
clients. The company is committed towards bringing a positive change in the current accounting
practices while helping all their clients to attain their ultimate objective. For them, success is
often symbolized as practice with purpose (Chen, 2016).
MYOB Group Corporate Strategies:
MYOB group has implemented various strategies in order to achieve their Mission and
Objectives. Some of the key Corporate Strategies by the company are:
Australian owned accounting software player, MYOB, has kicked off a major rebranding
program aimed at re-educating the market about its offerings and repositioning itself as an
innovative technology company.
As a part of providing a more holistic approach, MYOB merged all its core businesses into
single platform. This would help SME clients to single platform rather than trouble of going
through various sites. This came out as Connected Corpora rate Strategy of the company.
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Assistance of ABC model in achieving MYOB Group’s Strategies:
ABC Costing could be extremely help in case of MYOB group, especially because a lot of cost
of MYOB group is indirect cost i.e. one that cannot be directly noticed. With the help of ABC
costing, the MYOB group cannot convert all the indirect costs into those pools of cost that are
tangible in nature (conversion of Secondary pools to Primary pools) and know how these costs
are impacting their businesses. When the cost with each process will be known, they would
know how spending effect their profit and alter those to check the impact on overall business.
This would help in re-aligning their business process (Chewen, 2013).
In addition to this, they could also see the impact of their various corporate strategies on their
cost and the profit. For example: they have converted all their core businesses into single
platform, so this would have lead changes in their cost structure, this would have increased their
implementation cost while at the same time reduced the cost of maintaining different platforms.
If all these costs are in tangible form, they could easily analyze how these changes in cost have
impact in terms of business (decrease/increase in overall cost) plus the most important thing,
Whether changing of corporate strategies is helping them to get business or not i.e. increasing the
profit or not.
In addition to the above-mentioned points, all the functional departments and operational
activities would be defined precisely in relation to the activities, their respective requirements of
the resources and the total cost involved in the procurement of the resources and the cost
involved in the implementation of all the strategies along with the expected derived results
(Cohen, 2015).
Recommendation for implementation of ABC model:
The overall objective of ABC model is to streamline the process, which is only possible if it is
implemented everywhere. So, MYOB group should implement the process across its various
businesses, although the way it is streamlined would change because activity drivers are different
for each business. This should be done both in business operated offline and online, in particular
because most of the businesses would be a combination with some of the activities carried online
and other carried offline. After converting each activity into primary pool, it should be grouped
together so that fixed costs could be reduced which has earlier spread out. Another advantage of
grouping activities would be to see entire business as one rather than bunch of business; this
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would help in analyzing the impact of each activity on overall profitability rather than single
business. Another important step, that should be taken by the company is to analyze cost/profit
ratio of each activity especially those for which the ratio is more than 1, this would help the
company identifying the activities that consume a chunk of cost but are not adding any value to
the business (Drew, 2014).
Alternative Management Cost tool for MYOB group
Costing tool for any company would depend on the kind of the work the company is doing and
what are requirements of the company. As the demand of time, the company has adopted
digitization process, ABC costing along with Analytics could be considered as better option as it
would automatically streamline the process. In addition, it would provide a complete analysis of
each activity which was earlier done manually. It is managed by Web Survey Manager so it
picks up data automatically and uses it. Plus, it provides a very important benefit that manual
ABC costing could not provide, it takes into account the impact of unexpected activities on the
business. For example, a sudden change in policy or a new product released by the competitor. If
done manually, it would consume a lot of time to see the impact while it would be done in
relatively less time if done online. It would also help in improving the capacity management
system in the organization and improve the efficiencies of all the processes in the organization
(Gunasekaran, 2011).
Conclusion:
Although, ABC is not able to maintain market share due to emergence of various new methods.
But still ABC has its own relevance especially in a company like MYOB group where activities
are not streamlined, streamlining of activities would help company to achieve its objectives and
goals in faster and effective way.
ABC costing is a costing method where all the activities are converted to tangible form and
impact is analyzed in final productivity of the company. It helps us to know which activities
should be eliminated and if not eliminated, at least reduced. However, in the world of digitization
in order to gain maximum benefit of any method it is best to combine the same with the
information systems.
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References:
Amrik S. (2011), “Activity based costing in manufacturing: two case studies on
implementation”, Integrated Manufacturing Systems 9/3 [1998] 137-147.
Binshan, L., (2001), “Supply Chain Costing: An Activity-based Perspective”, International
Journal of Physical Distribution & logistics Management, Vol. 31 No. 10, pp. 702-713, MCB UP
Ltd.
Chen F. (2016), “Activity-based Approach to Justification of Advanced Factory Management
Systems”, Industrial Management & Data System, Vol. 96 No-2, pp. 17-24, MCB University
Press.
Chewen S., (2013), “Integrating ABC and TOC for better manufacturing decision making”,
Integrated Manufacturing System, Vol. 14 No. 5, pp. 433-441, MCB UP Limited.
Cohen, S., (2015), “ABC: Adopters, Supporters, Deniers and Unawares”, Managerial Auditing
Journal, Vol.20.
Drew, S, (2014), “Activity-based Costing for Logistics and Marketing”, Business Process
Management Journal, Vol. 10 No. 5, pp. 584-597,
Gunasekaran, H. (2011), “Application of Activity-Based Costing: Some Case Experiences”,
Managerial Auditing Journal 14/ 6 [1999] 286- 293.
John, C., (2000), “Activity-based Costing: A Powerful Tool for Pricing”, Journal of Business
And Industrial Marketing, Vol. 15 No. 1, pp. 23-33, MCB University Press.
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