Activity-Based Costing: Findings from Real-Life Manufacturing and Healthcare Business Studies

The report discusses the benefits of Activity-Based Costing (ABC) method in managing the cost of operations in manufacturing and healthcare industries. It includes an explanation of ABC, advantages of ABC, purpose of two studies, similarities and differences in findings, and outcomes from the studies. The findings from the studies will help Australian companies in implementing ABC in their business operations.

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Executive Summary
The management accounting is the provision that is related to the financial data and advice to the
company for making use of accounting tools that mainly include budgeting, activity-based
costing and others. These tools are essential to be used in the organization for the development of
business. The rise in the competition is not allowing the company to conduct the business
activities without the activity-based costing method. The report includes the description related
to the two studies that is based on the real-life manufacturing and healthcare business. The
analysis of the selected studies has been done which include purpose, similarities and differences
with the outcomes. Further, the findings of the studies reflect the outcomes that help the
Australian companies in implementing an ABC system in their business organisation.

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Contents
Introduction......................................................................................................................................3
Explanation of activity-based costing..............................................................................................4
Advantages of Activity-based costing method............................................................................6
Accurate product cost..............................................................................................................6
Information for the cost behaviour..........................................................................................7
Cost information......................................................................................................................7
Explanation of the purpose of the two studies.................................................................................8
Similarities and differences in the findings of the two studies........................................................9
Similarities in findings of both the studies..................................................................................9
Differences in the findings of both the studies..........................................................................10
Outcomes from the two studies.....................................................................................................11
Article 1.....................................................................................................................................11
Article 2.....................................................................................................................................12
Conclusion.....................................................................................................................................15
References......................................................................................................................................16

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Introduction
The report is based on one of the topics of the management accounting. The management
accounting topics are activity-based costing (ABC), budgeting, standard costing and many
others. The topic that has been selected for this report is Activity-based costing. Activity-based
costing is one of the important tools that are used by the real-life organisations. The aim of the
report is to explore the findings from the literature research from the selected studies. The studies
that have been selected include Article 1- Activity-Based Costing (ABC) – An Effective Tool for
Better Management and Article 2- The Excellence of Activity-Based Costing in Cost
Calculation: Case Study of A Private Hospital in Turkey.
Further, the details related to the management accounting topic has been discussed. In addition,
the explanation of the two studies, the research question and the similarities and differences in
the findings of the two studies are discussed in the report. In the end, the specific outcomes or
lessons learned from the two studies are discussed. These findings will further provide the
benefits to the Australian companies who are making use of the Activity-based costing
management accounting tool in their business operations.

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Explanation of activity-based costing
Activity-based costing method is a managerial accounting method that is used to trace overhead
costs to actions and then assigning the cost to objects (Kaplan and Porter, 2011). In order words,
it is the way to assign secondary and overhead cost to products or departments that help the
company to products or departments that produce these costs in the procedure of production.
Activity Based Costing is developed by Kaplan and Cooper in the Harvard business school for
calculating the product cost (Accounting learning, 2018). This product cost is classified as long-
term variable and short-term variable costs. These costing method emphases on determining
processes of production that is essential in processing a job. In addition, all these individual
activities are grouped together along with the same processes into a cost pool which is linked to
the particular activity cost driver. Further, this cost pool is analysed and allocated a prearranged
overhead rate that will ultimately be allocated to the particular jobs and products (CGMA, 2013).
The model includes two major activities which include: -
 Duration Drivers- These drivers help in measuring the time that is consumed by the
activities to accomplish.
 Transaction drivers- This talks about the number of times an activity takes place.

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(Source: CGMA, 2013)
In addition, activity based costing is an accounting technique that helps in determining assigned
cost to the overhead activities and then assigns a cost to the products. These management
accounting tools are used to determine the relationship between the cost, overhead activities and
manufacturing the products. The method follows the same relationship which is used by them to
assign the indirect cost to the products. Though, this is true that it has been found that there are
some costs in a business that is hard to be assigned with the help of the cost accounting
(Accounting tools, 2017). The indirect cost includes management and office staff salaries which
are hard to allocate to a product due to which this method has found its niche in the sector of
manufacturing.
This analysis shows that Activity-based costing is majorly used by the companies in the field of
manufacturing the products as it improves the reliability of cost data (Schulze, Seuring, and
Ewering, 2012). Thus, this contributes to produce true costs and better classifying cost of the

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company at the time of the production process. This is found that with the rise in the competition
the use of the activity-based costing method is used by the several companies that fall under the
different industries. These industries include hospitality, hospitals and healthcare, manufacturing,
consumer goods companies, and for many others (Randhawa and Sethi, 2017). All these
companies are getting numerous benefits of Activity-based Costing method due to which they
have started making use of this costing method in their organisation.
The reason behind the rise in the use of the Activity Based costing method is the objective of the
ABC method that provides the benefit to the companies. The objective includes rectifying the
inaccurate cost information, ABC also work to allocate the overheads on an activity basis, it
helps the management at making the decision on time with quality. All these objectives offer the
benefits to the company due to which they are able to compete in the market.
Advantages of Activity-based costing method
In the current era, the company who are making use of this model are getting numerous benefits
due to which they are able to manage their cost of operations (Shander, et al 2010). Activity-
based costing method is offering numerous benefits and some of them are discussed below: -
Accurate product cost
ABC brings the accuracy and reliability in determining the product cost by directing on the cause
and effect relationship in the cost incurrence (Noreen, Brewer and Garrison, 2011). Every
company gets the realistic outcome when they implement this costing method for eliminating the
indirect cost of their products. Moreover, this system is also used by the companies who offer the
diverse products (Drury, 2013). In addition, this method is adopted by the companies because
this accurate product cost was not possible in the traditional method of costing.

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(Source: Agarwal, 2018)
Information for the cost behaviour
Activity-based costing method is real in nature in terms of the cost behaviour and this is the
reason it helps in eliminating the cost and determining the activities which do not add value to
the products (Dale and Plunkett, 2017). This method allows the manager to control numerous
fixed overhead costs which are possible by exercising the control of the activities.
Cost information
Activity-based costing method offers the effective costing information that helps the managers to
manage the organisation and their working efficiently which is required to attain the better
understanding of the firm’s competitive advantage, strengths and weaknesses (Garrison, et al
2010). This is the effective way through which the company can earn the maximum of the profit
or can save the amount. This amount can further be used by the companies for making the right
decision for the products and services that they are offering to their customers (Weygandt,
Kimmel and Kieso, 2015).

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The above given are some of the benefits which the company is offering to the companies who
are implementing the Activity-based costing method. These benefits help the company in
generating the competitive advantage over their competitors (Pinto, 2010). ABC system is
effective that helps the company in managing the cost for the long run by controlling the
activities. The companies who are making use of the ABC not only get the cost-benefit but also
in managing the activities (Woodruff, 2018).
Explanation of the purpose of the two studies
The two Articles that have been selected for the analysis are selected with the purpose to learn
and to get the new research findings that will help the Australian companies in the near future
while implementing the activity-based costing system. The reason behind selecting the article 1
is to analyse how real life company – Nestle who is implementing Activity-based costing method
in Bangladesh. The article reflects that the data has been captured from both the primary and
secondary sources. Primary data has been captured by conducting the interview with the
employees of Nestle Bangladesh Ltd. and the secondary data has been collected from different
books. The purpose due to which the author conducted the research is to include the theories
related to the Activity-based costing and its application within the real-life organisation. The
author has conducted the research on the different cases of different cases but the major data has
been taken from the Nestle Bangladesh. The research question that has been included in the
article is; to identify the appropriate action based costing system that is used by the
manufacturing sector.
On the other hand, the second article that is selected as the study talks about the application of
ABC Systems to Health Care which is effective in the market of Turkey. The ABC system has

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been applied in the private hospital that is located in Istanbul, Turkey and it is one of the largest
private hospitals that are available in Turkey. The reason for selecting this article as a study that
this will provide the research findings related to the activity-based costing company in the
healthcare. This shows that apart from the manufacturing industry the Activity-based costing is
used in the other industries also which include health care. In this study, the author has selected
the Gynaecology department as the treatment unit for the particular hospital. The effectiveness
for implementing the Activity-based costing for the department is discussed in the report. The
major research question that has been answered in the research article is: The effective
implementation of ABC on health care sector.
Similarities and differences in the findings of the two studies
This section of the report includes the similarities and differences in the findings of the articles.
This is clear that both the selected articles are totally different from each other due to which
findings of the articles will show the more of different. Though, the method of Activity-based
costing remains the same with the same theories.
Similarities in findings of both the studies
 In the article 1, this is clear that ABC implementation helped the managers of Nestle
Bangladesh in making their decision more quick and accurate by comparing the actual
performance with the budgeted estimation for improving their business operations (Mahal
and Hossain, 2015). On other hand, Article 2 shows that the ABC system has helped the
administration of the healthcare service providers to plan for the better services within the
organisation after knowing the accurate performance. This will ultimately help the
administration of to bring the improvement in their business operations.

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 Article 1 findings reflect that the Nestle is able to enhance the operational performance
which is possible by allocating the overhead cost effectively. This shows that the
activities of the company get managed effectively with the low cost. Similarly, in the
article 2, the use of the ABC system offer the rise in the healthcare facilities cost
effectively without compromising the quality of service that they are offering to their
customers. The management of the healthcare in Turkey can easily control the cost
effectively with the use of ABC method (Aldogan, Austill and Kocakülâh, 2014).
Differences in the findings of both the studies
 The article 1 reflects the analysis of Nestle Bangladesh, a company that desiin aa n wide
range of products with geographical presence. This is the reason due to which the
company needs to apply that activity-based costing system with the help of which they
can easily manage the activities or processes that are present (Mahal and Hossain, 2015).
In addition, this method is appropriate when the company deals in diverse service. On the
other hand, Healthcare service which has the service diversity to manage but over here
the focus has been done on the particular department of the private hospitals that merely
include 2 services in the Gynaecology Department.
 The major difference lies in the findingofoe both the articles is related to the training to
the employees. In article 1, Nestle Bangladesh employees accepted the system of ABC
for their organisation and taken the training for the same. Though, on the other hand, in
the healthcare most of the employees are not able to understand the benefits of the ABC
system yet due to which they are not able to accept the system effectively (Aldogan,
Austill and Kocakülâh, 2014).

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 This found that implementation of ABC syshave has been done in the private
organisation for only single department where they are facing the issues. This shthehthe n
aat application of the ABC system is limited in health care sector. Though, on the other
hand, the use of the ABC system in manufacturing industry is done in each and every
department and on the overall operations of the business that they are conducting in the
competitive environment.
Outcomes from the two studies
This section includes the outcomes from the two studies that will be considered as the useful
source for the management accountants in the companies of Australia.
Article 1
Knowledge of management supports in making decisions
The implementation of the ABC system supports the management of Nestle Bangladesh in
making the decisions by comparing the original performance with the budget estimation.
Moreover, the top management of Nestle Company make use of the ABC software that
simplified the system of costing. This software is imported by the company from India and
Switzerland which shows that they have the knowledge of the effective use of the ABC system to
their company (Mahal and Hossain, 2015). Through this, the company will be able to evaluate
the consumer profitability which is one of the good indicators of the performance of the firm.
This shows that decision making is linked with the knowledge of the top management of Nestle
Bangladesh for the products and services.

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This reflects that Top management of companies in Australia are implementing ABC system
should know about the system and their uses in the business.
Improvement in performance and need of expert
ABC method of management accounting brought the improvement in the performance of the
employees. The outcome reflects the effective ABC implementation eliminates the cost within
the activities and manages them. This makes the activity cost-effective due to which the
performance of the company improves. This is also found that Chief accountant of Nestle
Bangladesh Ltd. was trained from China for 3 years. Moreover, the management also invited the
experts within the company to visit and train the employees. The employees of Nestle
Bangladesh have taken the ABC system positively. This is clear as the company deals in the
wide range of the products due to which they need to implement ABC effectively for which they
need to hire an expert.
This shows that the company who are implementing ABC system in their business need an
expert who can actually support them in effective implementation of the system in Australia.
Article 2
Outcome related to cost
One of the major outcomes of the research includes the elimination of the cost that is indirectly
related to the activities performed by the organisation. This cost difference can easily be
understood with the help of the analysis of both traditional and Activity-based costing. The
below-given table reflects the same for the private hospital in Turkey: -

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(Source: Aldogan, Austill and Kocakülâh, 2014)
The table reflects the indirect costs which are significantly different in both the method because
of the clear logic behind the cost allocation process. This has been found that the indirect cost of
the natural childbirth has increased in the method of ABC than the traditional costing which
means the profit of the company will decrease. In addition, it decreased for the caesarean
operations in ABC which a means a rise in profit of company. This shows that implementation of
the ABC method in health care is generally done in the organisation where the issue has been
identified.
There, healthcareh care companies in Australia need to identify the department in which they are
dealing the issues and then they should apply the ABC costing method. This will help in
eliminating the cost from the activity and enhancing the profit to the company.
Outcome related to decision making

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This is found that ABC implementation suhealthcareh care organisation in analysing the actual
performance which is must for the administrator because this actual performance will help the
health care further in making the accurate decisions. The decision related to the service-in-house,
providing new services and reorganising of service get improved. All these decisions are
essential for the hospital to enhance their profitability and also their performance in the
competitive environment (Aldogan, Austill and Kocakülâh, 2014). The management found that
this tool is valuable not only for managing the cost but also for improving the performance.
Therefore, the Australian Hospital management can effectively make use of the ABC system
while making the decisions for the company related to their service or cost.

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Conclusion
In the end, it can be said that company has to bring improvement in their products and
benchmark its activities with the most efficient in the world for which they are making use of
Activity- based costing method. The explana of activity-basedy- based costing as one of the
important management accounting tool has been discussed. The report includes the details
related to the two studies and these studies are Article 1- Activity-Based Costing (ABC) – An
Effective Tool for Better Management and Article 2- The Excellence of Activity-Based Costing
in Cost Calculation: Case Study of A Private Hospital in Turkey. The report includes the
similarities and differences related to the findings that are clear in the two studies. Moreover, the
outcomes of the articles are discussed which will be helpful for the Australian company.

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References
Accounting learning (2018) Activity Based Costing | Meaning | Features | Objectives |
Implementation [Online]. Available from: https://accountlearning.com/activity-based-costing-
meaning-features-objectives-implementation/ [Accessed on 26th September 2018]
Accounting tools (2017) Activity-Based Costing [Online]. Available from:
https://www.accountingtools.com/articles/2017/5/14/activity-based-costing [Accessed on 26th
September 2018]
Agarwal, R. (2018) Advantages and Demerits of Activity Based Costing (ABC) [Online].
Available from: http://www.yourarticlelibrary.com/accounting/costing/advantages-and-demerits-
of-activity-based-costing-abc/52617 [Accessed on 26th September 2018]
Aldogan, M., Austill, A.D. and Kocakülâh, M.C. (2014) The excellence of activity-based costing
in cost cala a culation: case study of a private hospital in Turkey. Journal of Health Care
Finance, 41(1).
CGMA (2013) Activity-based costing (ABC) [Online]. Available from:
https://www.cgma.org/resources/tools/essential-tools/activity-based-costing.html [Accessed on
26th September 2018]
Dale, B.G. and Plunkett, J.J. (2017) Quality costing. New York: Routledge.
Drury, C.M. (2013) Management, and cost accounting. New York: Springer.
Garrison, R.H., Noreen, E.W., Brewer, P.C. and McGowan, A. (2010) Managerial
accounting. Issues in Accounting Education, 25(4), pp.792-793.

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Kaplan, R.S. and Porter, M.E. (2011) How to solve the cost crisis in health care. Harv Bus
Rev, 89(9), pp.46-52.
Mahal, I. and Hossain, A., 2015. Activity-Based Costing (ABC)–An Effective Tool for Better
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Noreen, E.W., Brewer, P.C. and Garrison, R.H. (2011) Managerial accounting for managers.
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Randhawa, J.S. and Sethi, A.S. (2017) An Empirical Study to Examine the Role of
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Schulze, M., Seuring, S. and Ewering, C. (2012) Applying activity-based costing in a supply
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Shander, A., Hofmann, A., Ozawa, S., Theusinger, O.M., Gombotz, H. and Spahn, D.R. (2010)
Activity‐based costs of blood transfusions in surgical patients at four
hospitals. Transfusion, 50(4), pp.753-765.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E. (2015) Financial & managerial accounting. New
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