Activity Based Costing as a Managerial Tool: Analysis of Two Journal Papers

The main purpose of this assessment is to analyse activity based costing as a managerial tool which can be used in business processes. The study shows two different journal papers. Based on these journal papers, the applicability of activity based costing can be shown in business. The journal considers two companies for this assessment, one in US while the other company is based in Nigeria. This study considers the journal articles of the two businesses. Based on the findings and their outcomes, four outcomes can be suggested to Australian firms which can be achieved by following activity based costing techniques.

MANAGERIAL ACCOUNTING
Managerial Accounting
Name of the Student
Name of the University
Author Note

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Executive summary
The main purpose of this assessment is to analyse activity based costing as a managerial tool
which can be used in business processes. The study shows two different journal papers.
Based on these journal papers, the applicability of activity based costing can be shown in
business. The journal considers two companies for this assessment, one in US while the
other company is based in Nigeria. This study considers the journal articles of the two
businesses. Based on the findings and their outcomes, four outcomes can be suggested to
Australian firms which can be achieved by following activity based costing techniques.

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Table of Contents
Introduction................................................................................................................................4
Introduction to activity based costing........................................................................................4
Evaluation of scope and Research areas of Activity based costing...........................................6
Analysis of Article 1..................................................................................................................7
Analysis of Article 2..................................................................................................................9
Similarities and differences between the two articles..............................................................10
Similarities...........................................................................................................................11
Differences...........................................................................................................................11
Four Specific outcomes from the research paper which can help Australian management
accountants...............................................................................................................................12
Conclusion................................................................................................................................13
References................................................................................................................................15

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Introduction
Managerial costing is an accounting process that considers the aspects of cost of a
business. It also reflects the way it is used by the businesses in decision making process.
These processes are undertaken by the management which helps them to make decisions to
undertake many vast related decisions in management. The accounting process is closely
related to cost accounting process(Akinyomi ,2014). Its main functions is to measure, classify
, analyse and communicate information to the business managers. These processes are
undertaken by the management so that appropriate decisions can be taken for the
organisation. This report will concentrate on the method of activity based costing . This can
be implemented as a costing method to a business for the purposed of reporting information
that is vital to any organisation. The first part would provide a basic idea of the activity based
costing . Then it needs to be applied for the same in a business organisation(Tsai et al., 2014).
The assessment will also be analysing two articles which are related to activity based
costing practices in an establishment. These journals will shed light on the application of
activity based costing in an organisation. It will also illustrate how the same can be useful in a
business practice. Apart from this, a section of the report will portray similarities and
differences . These similarities and differences will focus on the two journal papers which
have been taken as per the requirements of the assignment. The assessment will conclude
after showing the benefits that can be achieved if the management team achieves activity
based costing.
Introduction to activity based costing
Activity based costing is a procedure by which an organisation can assign costs in
relation to different activities of a business.It is a new and modern method of costing that
categorises the actions of an organisation. After such claasification has been done, it then

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assigns the cost of each activity with respect to all the products and services that fit the
pattern of consumptionin relation to each activity. This costing method apportions more
indirect cost into direct costs when compared with that of conventional costing. It is
essentially a method of accounting which identifies the activities that a firm executes. After
such identification, it then allocates indirect costs to cost objects(Monroy, Nasiri &
Peláez,2014).
If a company undertakes activity based costing , it can thoroughly evaluate the cost elements
of entire products, activities and services. Thiis will provide a great decision making tool to
help inform a company’s decisions to either:
 Classify and exclude unprofitable products and services
 Identify and eliminate ineffective production or service proceses .Next assign
processing perceptions that lead a better yield on the same product.
In a business organisations, the ABC costing allocates the resource costs of an
organisation. It allocates these costs through product activities and services that are
delivered to the customers. It is a decision making tool that best understands
profitability ,product cost and customer cost on the basis of performing processes.
ABC has been mainly used to support decisions of a strategic nature. These strategic
decisions relate to pricing, outsourcing and the measurement of initiatives that
involve improvement of process initiatives. (Siguenza-Guzman et al., 2014).
ABC can be applicable all throughout business proceses . Its main applications
include:
 application throughout the financing, costing and activities of a company
 This method helps identifying unproductive products, departments and activities
 Helps to control the product level as well as departmental level costs.

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 Helps identifying unnecessary costs that could be removed(Carli, G., & Canavari, M.
(2013)
 Helps setting the price of a product or service .
A controlling principle that makes an ABC effective is that it keeps the end product in
kind. There must be a convincing motive that exists to change the existing cost system. The
ABC system needs to be warranted on a cost benefit basis, regarding it implementation. It is
similar to any other investment(Cannavacciuolo, et al., 2015). Mostly large companies
implement ABC using a pilot project approach, IN this approach, a section of the
organisation is designated for implementing ABC costing systems. The pilot project can be
applied through the process of allocationg actual revenue and expenses. While implementing,
the cost drivers of ABC are identified and from those identifications, activity costs are
calculated. The success of the pilot project can also be used to authenticate the case on the
business side of things for implementing ABC company wide(Charaf & Bescos, 2013) .
Evaluation of scope and Research areas of Activity based costing
The importance and application of activity based costing in management accounting
practices in a business can be illustrated with the help of two journal entries that are
considered in this study. The journal articles are considered because they help in evaluating
the usefulness and practicality of activity based costing practices in business(Nassar, et al.
2013). The articles that are considered for the purpose of this evaluation include:
Article 1-Influence of competition on activity based costing implementation in Nigeria
Article 2- Implementing Activity based costing systems in small manufacturing firms/;A field
study
The following paragraphs will continue detail discussion about the articles that are
considered as part of this assessment

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Analysis of Article 1
This journal article focuses on the manufacturing sector in Nigeria and how the
influence of activity based costing can help organisations gain a competitive edge over other
organisations , especially the ones that produce substitute products. This study scrutinized the
impact that the competition had on the Nigerian manufacturing sector on activity based
costing.
There is intense competition among the sellers in Nigeria with regards to increasing
goals towards an enhancement in market share and sales volume These goals can be
accomplished by changing the elements of the marketing mix . The elements of the marketing
mix includes price, product, distribution and promotion. The manufacturing companies in
Nigeria are presently on the brink of rigid competition at both local and worldwide markets.
To stay market relevant, the manufacturing organisations in Nigeria must endeavour to
produce a more competitive edge over other organisations ,especially the ones that produce
substitute products.( Langmaak, et al., 2013) According to this article, the intensity of
competition affects the implementation of costing systems. More intense the competition ,
more the firms tend to implement more refined cost accounting systems. Less the intensity of
competition, more the firms stick to traditional measures.
According to other sources, there have been found to be different results while
studying the influence of competition on activity based costing. These results are very much
different than what the expected results would be There are not so many companies in
Nigeria that do implement activity based costing. The ones that do have a much lower
percentage of export sales and a lower number of competitors. (Kaličanin, & Knežević,
2013). As per another set of results, it is found that indicate that this study is in uniformity
with a popular expectation. The expectation includes the fact that the percentage of export
turnover and the change in competition practices are significantly greater while being

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compared to the companies that employ ABC implementers than the companies that do not
employ ABC. Preceding studies have reported that while considering both local and
international markets ,the manufacturing segment in Nigeria are on the cusp of facing
demanding competition from local and global competitors (Rundora, Ziemerink, &
Oberholzer, 2013). However the effect of competitive force regarding the implementation of
ABC on the manufacturing segment in Nigeria has not been identified.
This article also examine the relations between behavioural, organisational and
technical diversity factors and the sources of ABC implementation. When incorporating
these factors into context, it can be found that competition can significantly influence the
implementation of activity based costing system. The higher the competition level , the more
likely it is for the organisation to implement ABC. This implementation will help the
company in gaining a competitive edge over its competitors(Pazarceviren & Celayir, 2014).
This intense competition is forcing the companies to pay a more stringent attention to cost,
quality and time. A sample survey of companies in Nigeria was conducted. It was found
that there was a positive association among the application of activity based costing and the
competition level..
Descriptive statistics were used to implement the influence of the implementation of
activity based costing in Nigeria. According to this article, the inability of traditional costing
systems to provide relevant costs is a major reason on why traditional costing systems are not
effective in today’s environment(Gurcanli, Bilir & Sevim, 2015). The traditional methods of
costing ate not good enough to improve global competition. Activity based costing is a lot
more effective when it comes to implementation . This is because there is an increasing
variety of products, competition and increasing overhead costs.

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This research paper illustrates the concept with the help of a Nigerian
telecommunication company Helpline Telecoms Nigeria Ltd. This company previously
implemented traditional costing systems which was not reflective of the actual costs that the
firm incurred in the business. It is not an actual portrayal of the total costs of the firm. After
the firm implemented activity based costing it is found that the cost system is more reflective
of the actual costs that the firm had to incur. It is more effective because of the increased
range of competition. products and increased overhead. that thiscost system will offer.It will
also help the company the firm to achieve a competitive edge over its competitors that
include Globacom and IHS Towers.
Analysis of Article 2
This particular article designates the results of a study concerning the implementation
of activity based costing method in small companies that manufacture products.The possible
impacts of implementing ABC at these companies are surveyed. The activity based costing
implementation in small companies will differ from that of large companies. It will impact
the decision making of a small company(Aldogan, Austill, & Kocakülâh, 2014).
Most small companies are unaware of the pros of ABC system from the viewpoint of
small businesses.Such businesses cannot perform activity based costing due to reasons like
non identification of improvement initiatives and information collecting regarding idle
capacity costs. due to benefits of excel spreadsheet, small companies have helped small
companies acquire the benefits of activity based costing inspite of not possessing the
technical software. Small companies can use the analytical hierarchal process to develop cost
matrices that can help develop the activity based costing system(Hardan & Shatnawi, 2013).
There are also new applications of ABC in small companies. Many companies are still
unaware that by adopting these cost systems they can better understand their own companies
cost structure.However in order to effectively implement activity based costing system the

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small manufacturing companies need a more reliable and precise means of costing
information. small companies are generally apprehensive of adopting activity based costing
because it requires huge time and effort(Pietrzak, 2013). They worry about the fact that the
benefits of implementing activity based costing systems will not outweigh the equited time
and effort that the company put in(Hofmann, et al., 2013).
This paper helps illustrate the concept of small firms implementing activity based
costing through the company Enviro- Log in USA. It is a company that manufactures earth
friendly fire logs and fire starters. It is the largest recycler of waxed old corrugated cardboard
in North America. This is a company that inspite of its small size of operations has
effectively implemented activity based costing systems. Before implementing activity based
costing systems , the company assigned manufacturing cots to products using an industry
based costing rate based on direct labour. non manufacturing costs were assigned to products
through a percentage based on total cost. It required a huge time and effort on the part of the
company to implement activity based costing systems. Today effective costing systems like
ABC implementation has helped this company in achieving a reliable costing structure. This
has helped the company in effectively maintaining actual costs and as a consequence has
increased its overall effectiveness(Godil, Hasan & Abid, 2013).
Similarities and differences between the two articles
The similarities and differences which can be identified from the two journal papers can be
illustrated as follows:
Similarities
 Both the journal papers consider the activity based costing systems . These papers
provide an adequate discussion of the benefits and the corresponding limitations of

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activity based costing systems. This might be applicable as a monitoring tool to
manage the costs of the organisations
 Both articles consider the effective implementation of activity based costing systems
and its impact in overall decision making and effective costing practices.
 Both articles highlight the usage of activity based costing as opposed to traditional
costing methods
Differences
 The point of difference which can be identified from the analysis of the two papers is
the scope of the paper. While the first article analyses the influence of competition on
activity based costing and how activity based costing can help companies gain a
competitive edge , the second article illustrates how small manufacturing companies
can best effectively implement activity based costing inspite of huge time and effort it
takes for the company to implement activity based costing.
 The research articles focus on companies in two different countries. While the first
article focuses on a Nigerian company called Helpline Telecoms Nigeria Ltd., the
second article focuses on a US company called Enviro Log in USA. The nature of
two companies is different. While Helpline telecoms Nigeria Ltd is a
telecommunication company, Enviro Log is a company that manufactures fire logs in
USA.
 The scale of the two companies is different. While Helpline Telecoms Nigeria Ltd is a
massive company having huge scale operations in USA. the company Enviro Log is a
small scale manufacturing company. the practices of the business are different and
therefore it can estimate that both companies apply activity based costing under
different scenarios.

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Four Specific outcomes from the research paper which can help Australian
management accountants
The analysis of the two research papers which are shown in the discussion below
shows the scope of activity based costing with reference to business organisations. The
outcomes can be used by management accountants in Australia are given below:
Profit increase
The capacity for profitability of the business is affected by the decision making and
overall cost practices of the management. Both research practices have shown that the
company can achieve profitability by employing activity based costing., irrespective of the
size of the firm. Activity based costing can bring about improvements in business. This can
happen by establishing an effective mechanism in place. The activity based costing method ,
if properly implemented by Australian businesses can bring about significant improvements
in determining an efficient method of cost control.
Planning and decision making
Activity based costing helps in better planning and decision making of all available
units. it helps the management to provide a better sense of planning control as they can use
more reliable data. It allows the management to monitor targets and set them in terms of
effective cost procedures. This will help Australian organisations to grow and develop and
have a better planning and decision making structure in place by using activity based costing.
Information about cost driver
ABC helps in understanding the nature of behaviour of costs. It also helps in the
reduction of costs in reference to activities that have no added benefit on the particular
product. With the help of this management tool, the management can control fixed overhead
costs. It can also exercise further control over activities that have a more straightforward

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influence on the cost activities of the business. this will help Australian organisations to
develop a more sound cost structure in terms of its overall cost position.
Cost reduction
ABC helps in the identification of cost drivers which help reducing costs . These can
help in identifying cost drivers with a range of applications. Management accountants need to
employ activity based costing in order to reduce costs by pooling the cost drivers together
and foster cost reduction with the resources provided under activity based costing. The
managers in Australia need to take note of this fact and undertake activity based costing to
reduce costs .
Conclusion
The above discussion shows two different journal articles which emphasizes on the
application of activity based costing practices in business. The above discussion shows the
relevance of activity based costing in businesses as well as how it can be applicable to small
businesses as well, in the manufacturing sector. It also discusses the impacts of ABC in
businesses in terms of its overall decision making, profit generating ability of the business
and in monitoring cost control. The practices of activity based costing can help companies
achieve a better cost structure and more efficient cost control in terms of reducing overall
costs and consequently improving profitability. The two companies that have been chosen
per this extract have effectively implemented activity based costing and used it to achieve a
sustainable outcome in business. This discussion clearly shows that activity based costing, if
implemented properly can give a huge boost to business although initially it requires a huge
time and effort to implement it. Thus from this analysis it is evident that all businesses can
implement activity based costing considering it has the resources and tools to do so.

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References:
Akinyomi, O. J. (2014). Influence of competition on Activity-based costing system
implementation in Nigeria. International Journal of Information, Business and
Management, 6(1), 11.
Aldogan, M., Austill, A. D., & Kocakülâh, M. C. (2014). The excellence of activity-based
costing in cost calculation: case study of a private hospital in Turkey. Journal of
Health Care Finance, 41(1).
Cannavacciuolo, L., Illario, M., Ippolito, A., & Ponsiglione, C. (2015). An activity-based
costing approach for detecting inefficiencies of healthcare processes. Business
Process Management Journal, 21(1), 55-79.
Carli, G., & Canavari, M. (2013). Introducing direct costing and activity based costing in a
farm management system: A conceptual model. Procedia Technology, 8, 397-405.
Charaf, K., & Bescos, P. L. (2013). The role of organizational and cultural factors in the
adoption of Activity-Based Costing: The case of Moroccan firms. Accounting and
Management Information Systems, 12(1), 4.
Chen, A., Sabharwal, S., Akhtar, K., Makaram, N., & Gupte, C. M. (2015). Time-driven
activity based costing of total knee replacement surgery at a London teaching
hospital. The Knee, 22(6), 640-645.
Elhamma, A., & Zhang, Y. I. (2013). The relationship between activity based costing,
business strategy and performance in Moroccan enterprises. Accounting and
Management Information Systems, 12(1), 22.

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Gurcanli, G. E., Bilir, S., & Sevim, M. (2015). Activity based risk assessment and safety cost
estimation for residential building construction projects. Safety science, 80, 1-12.
Hofmann, A., Ozawa, S., Farrugia, A., Farmer, S. L., & Shander, A. (2013). Economic
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Kaličanin, Đ., & Knežević, V. (2013). Activity-based costing as an information basis for an
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Khataie, A. H., & Bulgak, A. A. (2013). A cost of quality decision support model for lean
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Monroy, C. R., Nasiri, A., & Peláez, M. Á. (2014). Activity Based Costing, Time-Driven
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11-17). Springer, London.
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Pazarceviren, S. Y., & Celayir, D. (2014). Target costing based on the activity-based costing
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Pietrzak, Ż. (2013). Traditional versus activity-based budgeting in non-manufacturing
companies. Social Sciences, 82(4), 26-37.

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Ruiz-de-Arbulo-Lopez, P., Fortuny-Santos, J., & Cuatrecasas-Arbós, L. (2013). Lean
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