Activity Based Costing (ABC) Model Implementation in Dominos Enterprise Limited

HI5017 Managerial accounting
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Contents
Executive Summary:........................................................................................................................3
Introduction......................................................................................................................................4
A) An explanation of ABC model and its features................................................................5
B) An explanation of how ABC model aligns with the current goals and strategies of the
company.......................................................................................................................................7
C) Provide at least two (2) recommendations about the implementation of ABC model for
your company based on your research findings..........................................................................8
D) Apart from ABC model, suggest one other management accounting tool suitable for your
company and justify it.................................................................................................................9
Conclusion:....................................................................................................................................11
References......................................................................................................................................12
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Executive Summary:
Activity based costing (ABC) is a tool used for analysing costs and profitability which is based
on organisation processes and production. In other words ABC is a technique which aid in
managerial and strategic decisions such as identification, outsourcing costing, pricing and
measurement. Here in Dominos Enterprise Limited which is (ASX Listed) the top most level
executives like senior managers, Board of Directors and CEO have improved their
management accounting system with the introduction of ABC model in their management
system.
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Introduction:
Dominos enterprises are a brand, simply a pizza restaurant chain. Dominos is an ASX Listed
company which is engaged in restaurant chain. Dominos has a good franchise in the whole
world. The organization has series of operational activities which incurs costs and is require
maintaining costing activities. This report will make analysis about ABC model which stand for
activity based costing. It analysis is a process of classifying inventory items based on
consumption value. This approach is based on Pareto principle which helps in inventory
management. To implement this ABC technique the management access the cost and demand
information per item. Benefits of this approach is to have better control over high value
inventory level so that it reduces cost and improves benefits.
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A) An explanation of ABC model and its features
Meaning of ABC model
ABC is a mechanism for costing segregation and is based on the actual consumption by
each. This concept was developed in late 70’s and 80’s. As previous costing systems was
not much useful in determining costs of production. It ultimately lead to wrong decisions
(Mahal, and Hossain, 2015).
Activity based costing is the method of costing that basically deals with the indirect cost.
Indirect cost includes such as management, office staff salary, etc. This method helps in
recognizing the cost of the organization at each level. It is an accounting method through
cost is allocated and assigns the cost to different activities which are demanding. This
method deals with the relationship with of cost, product and their activities. The ABC is
used to target costing, to analyse the profit of the company. ABC costing identifies the
overhead cost and the final output of costing. This cost is concerned with matching cost
called cost drivers. Some cost such as indirect cost (overhead) like staff salary are difficult
to calculate so sometimes its consider that ABC method in manufacturing cost are difficult
to ascertain so it is not consider a relevant method. Methodology of ABC focuses on cost
allocation which helps to separate different costs such as variable costs, fixed costs and
other overhead costs (Plank, 2018).
Features of ABC:
1. The cost is divided into two parts the fixed cost and variable cost. These two costs are
important for the framework of accounting. These two costs are design to find out the
actual cost in the company.
2. ABC model follows the cost behaviour pattern. They relate to different things such as
time, events, volume, etc.
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3. To determine the accurate cost driver in a cost behaviour pattern for tracing the
overhead product is a challenging one.
4. Direct material and direct labour cost has to be determined for relatable cost drivers.
5. ABC is a method in which firstly costs of the resource are found then there is need to
allocate that cost to some specific product.
6. ABC methods based on arbitrary method rate and it is typically used to calculate indirect
cost to product cost (Hardan, and Shatnawi, 2013).
Though there are number of benefits of ABC model but is also have certain limitations such as
follows:
 Difficult in installation: ABC model is difficult to install in a company and for such
comprehensive installation in a company there should be needed a high level of
competent staff and management.
 Reporting of unused time: This analysis wants the employees to report on how they
spent time on various activities but the employees lacks in giving the proper
attendance.
 Separate date base: For doing such a tedious task one has to make separate ledger
accounts to solve its query which is cumbersome process.
 Need of trained managerial staff: For performing a sound level of ABC Model the
company should maintain a trained managerial staff.
 Difficult in collecting information: It is another limitation of collecting information
from various sources.
 Targets not met: Mostly the compared performance does not match with current
performance. (Joseph, and Vetrivel, 2012).
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B) An explanation of how ABC model aligns with the current goals and strategies of the
company
i) An identification of the company’s mission and objectives;
The main objective of Dominos (ASX LISTED) is to establish the policy for the effective control.
The main aim is to utilize the efficient material of the economy with proper management.
Every company wants to earn the profit so for that they have to increase the sale of pizzas.
The main aim is to meet with the customer satisfaction, to fulfill all their needs. Their main
focus is also on quality rather than quantity, ABC model focuses on each and every activity
which will aid in improvising quality processes (Joseph, and Vetrivel, 2012).
ii) An identification of the company’s corporate strategies;
Dominos enterprise is the world’s biggest company of pizza. Their main strategy is to fulfill the
customer’s satisfaction by giving their order, delivery on time. They strategy is to provide the
fast service so it’s attract the customer and at the same time it give the delicious and excellent
taste. The main strategy is to serve the whole world with the preferable taste and preferences.
Domino’s is a big brand so its strategy is also to be in market with good reputation. Company
should have an organizational or strategically plan to compete with the new competitors in
the markets. ABC model aids in defining corporate strategy and also defines company’s
profitability forecasting (Joseph, and Vetrivel, 2012).
iii) An explanation of how ABC model assist in achieving the company’s strategies
ABC models helps in achieving the company strategy by managing their cost accounting. ABC
model helps in doing the planning of strategically or organizational planning. They also assist
in making the capital budgeting. They help to reduce the target reduction. ABC models helps in
decision making and continuous improvement in the performance.
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C) Provide at least two (2) recommendations about the implementation of ABC model for
your company based on your research findings.
The ABC model must be implemented in Dominos enterprise limited as it makes the
operational activities cost segregation and also allow flexible costing.
1. Due to the Activity Based Costing Process Flow:
 Identify Cost: This is the most critical step since it is important to eliminate wastage of
resource and this process is also time-consuming because allocating cost to each
product takes time.
 Load secondary cost pools: this cost generally includes computer services and
administrative salaries and other cost as well.
 Load secondary cost pools: This cost mainly includes research and
development, procurement, distribution and advertising
 Measuring activity drivers: This can be expensive to accumulate activity driver
information using a data that to allocate costs to primary costs.
 Formulating reports; it just formulates reports which describe ABC costing into
documentation (Kaplan, et. al., 2014).
2. Due to its numerous benefits, it must be implemented by Dominos:
1. Better control over the high value of inventory level thus reduces the cost of product and
improves profitability.
2. Allocation of cost to each product reduces improves the benefits.
3. Fewer stocks outs improve the production efficiency.
4. It becomes more reliable to the company and improves the customer satisfaction.
5. Lowers the distribution cost.
6. ABC analysis is very good in determining the overhead cost.
Thus, the reasons due to which Dominos Company must implement ABC model are good
Management, accurate Calculating costs, ensuring customer profitability,
evaluating investments in new technologies, improving product quality, managing costs,
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supporting other management innovations, and better performance measurement (Kaplan, et.
al., 2014).
D) Apart from ABC model, suggest one other management accounting tool suitable for your
company and justify it.
Hence, other technique apart from ABC model is ERM and is discussed as below:
Enterprise risk management (ERM)
Risk management is the main criteria for ERM. It generally used by business to how overcome
the any risk related to future outcomes. It involves a process of planning, leading and
controlling all the business affairs in terms to minimize the risk and maximize the profits.
It includes financial, strategic and operational risk plus the accidental risk. Risk management
generally rescues the company from the external factors like strikes, lockouts, public violence
etc. It reduces enterprise risk with the risk management (Ashworth, and Perera, 2015).
Types of risk involved in company:
It contains different risks such as financial, operational and hazard risks.
Process of Risk management
1. Understanding of context: understanding on which factor the affairs of organisation exist
external or internal factor.
2. Identifying Risks: This can be explained how can a company can met the threats to
company. The threats should be known as they do not exploit company’s competitive
advantage.
3. Analysing Risks: it includes the creation and outcomes of risks.
4. Integrating Risks: aggregation of all risks its distribution and its impact on organisation.
5. Assessing Risks: Assessment of risk to the aggregate risk profile.
6. Controlling Risks: it controls risks.
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7. Monitoring and reviewing: It includes monitoring and implementing better risk assessment
strategies (Ashworth, and Perera, 2015).
Goals of an ERM program
Every company faces the risk, risk is always associated with certainty and uncertainty there are
some factors which are not in control of an organisation for such that there is a risk
management , which can rescue a company and leads a company for focus on coordination
and upliftment it also improves the competitive edge in the long term basis (Ashworth, and
Perera, 2015).
Type of risk functions:
1. Strategic planning
2. Marketing
3. Compliance & Ethics
4. Financial compliance
5. Law maintenance
6. Insurance
7. Operational Assurance
8. Operations management
9. Internal audit
Challenges in ERM implementation
1. Executives who sponsors ERM.
2. Efficient staff who will conduct internal audit.
3. Developing a technical ERM framework
4. Monitoring the results of actions taken
5. Developing action plans
6. Demonstrating risk management effort
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7. Establishing a risk committee
8. Identifying risk inventory
9. Formulating plans
10. Establishing ownership for risk management (Ashworth, and Perera, 2015).
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Conclusion:
Dominos is a big brand and the largest distributor of pizzas in the world with the delicious
taste. It must implement ABC model technique as the company has large number of
operational activities. ABC is a modern way of costing which segregates costing techniques on
the basis of activities. ABC model or ERM are the two management accounting tools that has
emerged as a boon to the organisation as because it not only save the cost but also helps its
employees to achieve a competitive edge by reducing time on allocation of cost or get
confused with the risk planning . This tool helps the managers to focus on strategic decisions
and organisational planning. In short it lessens the burden of not only top level managers but
also helps customer satisfaction. Dominos Company should really apply this management style
in order to improve a successful running of the business.
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References:
 Ashworth, A. and Perera, S., 2015. Cost studies of buildings. Routledge.
 Hardan, A.S. and Shatnawi, T.M., 2013. Impact of applying the ABC on improving the
financial performance in telecom companies. International Journal of Business and
Management, 8(12), p.48.
 Joseph, J. and Vetrivel, A., 2012. Impact of target costing and activity based costing on
improving the profitability of spinning mills in coimbatore-empirical study on spinning
mills. Journal of Contemporary Research in Management, 7(2), p.41.
 Kaplan, R.S., 2014. Improving value with TDABC. Healthcare financial
management, 68(6), pp.76-84.
 Kaplan, R.S., Witkowski, M., Abbott, M., Guzman, A.B., Higgins, L.D., Meara, J.G.,
Padden, E., Shah, A.S., Waters, P., Weidemeier, M. and Wertheimer, S., 2014. Using
time-driven activity-based costing to identify value improvement opportunities in
healthcare. Journal of Healthcare Management, 59(6), pp.399-412.
 Mahal, I. and Hossain, A., 2015. Activity-Based Costing (ABC)–An Effective Tool for
Better Management. Research Journal of Finance and Accounting, 6(4), pp.66-74.
 Plank, P., 2018. Introduction. In Price and Product-Mix Decisions Under Different Cost
Systems (pp. 1-5). Springer Gabler, Wiesbaden.
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