Importance of Activity Based Costing in Organizations

The report evaluates the importance and implementation of Activity Based Costing (ABC) in organizations. It explains the benefits and barriers of ABC through two selected journal articles. The first article focuses on detecting inefficiencies in healthcare processes, while the second article determines the impact of ABC on organizational performance using contingency theory. The findings suggest that ABC helps in reducing overhead costs, improving process efficiency, and generating higher performance. However, barriers such as lack of resources and commitment from management hinder its implementation.

Running head: MANAGERIAL ACCOUNTING
Managerial accounting
Name of the Student:
Name of the University:
Author’s Note:

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Abstract:
The report is prepared for evaluating the research paper relating to the implementation and
importance of ABC (activity based costing) in different organization. The selected management
topic that is ABC has been explained in the current study. Furthermore, the similarities and
differences in the two selected journal articles have been explained. The outcomes and lessons
derived from such research papers and its usefulness to the management accounting
professionals have been demonstrated.

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Table of Contents
Introduction:....................................................................................................................................2
Discussion:.......................................................................................................................................2
Explanation of activity based costing:.............................................................................................2
Explanation of article 1:...................................................................................................................3
Explanation of article 2:...................................................................................................................5
Explanation of similarities and differences between the findings of two articles:..........................8
Research findings useful for the management accounting professionals:.......................................9
Conclusion:....................................................................................................................................10
References list:...............................................................................................................................12

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Introduction:
The report is prepared for conducting the research on the topic “Activity Based Costing”
by selecting two journal articles from the accounting and management accounting journals. It is
suggested by recent literature in management accounting that there have been considerable
changes in the environment in which management accounting is practiced. Such changes have
been due to highly competitive environment, information technologies, new management
strategies, customer services and new focus on quality. The practice of management accounting
has introduced new management and cost accounting systems such as activity based costing,
customer costing, balanced scorecard and activity based management (Chak and Fung 2015). In
developing countries, there is little research on the adoption of such advanced practices. It is
suggested by the evidence that during the last decades, there have been changes in the
management accounting.
Discussion:
Explanation of activity based costing:
Activity based costing (ABC) is the method of managerial accounting that helps in
tracing the overhead cost to the activities and accordingly assigning them to objects
(accaglobal.com 2018). Such costing method has the main focus on process of production or
identification of activities that are used in processing a job. After then, grouping of such
individual activities are done with similar process into a cost pool relating to single activity cost
driver. Such method of costing is regarded as the most accurate way of assigning indirect cost
and helps in overhead expenses allocation to products and jobs based on the amount of activities
that are required to produce the product. ABC is a methodology for allocation of overhead cost

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in a precise way that helps in reducing the overhead costs (Ax and Greve 2017). Such costing
method establishes a causal link between the indirect costs and cost drivers which helps in
stimulation of transparent, responsible and cost conscious drivers. Employees would be able to
understand different cost categories that would help in analysis of activities adding value with
the implementation of ABC. Such analysis helps in ascertaining activities that do not add value
to the organization and hence should be eliminated. The calculation of integral cost of products
can be done accurately with the implementation of such costing method (Makrygiannakis and
Jack 2016).
An organization can derive various advantages using the system of activity based costing
in terms of customer profitability, cost of distribution, production facility cost and activity cost.
Overhead cost allocation to the cost objects deserving to be charged with cost of overhead
enables mangers to see the activity drivers that should be reduced that would help in shrinking of
overhead cost.
Explanation of article 1:
An activity-based costing approach for detecting inefficiencies of healthcare processes”
An article has been selected from accounting, auditing and accountability journal that
reports on a field study of change in management accounting in the context of healthcare
organizations of Italy. The article explores the change in management accounting indicating why
innovative or new accounting practices have or not have been adopted in the organization. The
objective of this research paper is to conduct the investigation on the integration of activity based
costing into the pre existing accounting system for supporting the healthcare organizations for
identification of inefficiencies relating to the reengineering innovation and diagnostic therapeutic

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pathways (Messner 2016). Such analysis intends to play a critical role in implementation and
designing of cost accounting systems. It has been outlined in the literature that there is an
increased investment by healthcare organization in systems and sophisticated tool of cost
accounting such an activity based costing. There is wide availability of information on growing
importance of application of ABC in detecting cost associated with inefficient productive and
organizational process. The objective of this research paper is to contribute the implementation
and use of ABC technique in healthcare organizations and literature (Van der Stede 2015).
Analysis of research presents the section on literature relating to the importance of ABC in
healthcare organization and implementation of ABC in the healthcare process.
Research paper has explored the benefits arising from use of ABC system as a technique
of costing in depth along with structured method producing valuable measurements concerning
the performance of process. In the healthcare structures in the current scenario, there is no
implementation of ABC system because it requires organization to overcome a set of
organizational, culture and technical barriers (Cannavacciuolo et al. 2015). The case study is
designed for exploring the usefulness of the application of ABC in terms of reengineering and
process improvement. It has been found that the result of this particular research paper deals with
the identification of the barriers in the application of such costing system and advantages to
healthcare organization (McLean et al. 2015).
Two level of analysis has been performed by referring to the cost information usefulness
obtained by ABC implementation. In the first level, DRG tariff and DTP cost have been
compared that leads to identification of loss or profit. The information that has been obtained
from the ABC approach application to the given case is indicative of the fact that efficiency of
this specific DTP can be increased by exclusively focusing on critical activities and resources

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(Latan et al. 2018). Furthermore, it is indicated by the case study analysis that ABC technique
helps in inferring measurement of cost associated with the each activity and thereby contributing
to performance management process. The resources and activities characterized by cost are
highlighted by the activities of ABC that provides with a detailed picture of structure of costs to
the managers. It is highlighted by the analysis of case study in this particular paper that managers
can be guided in detecting the opportunities for improving the care process efficiency with the
help of information of cost that is obtained by the application of ABC (Lavia and Hiebl 2014).
Furthermore, the implementation phase of ABC points out the advantages and barriers that is
characterized by the accounting system cost centre. However, it is not possible to generalize the
barriers depending upon one case study.
Explanation of article 2:
Another article has been selected is about determining the impact of activity based
costing performance of organization. It has been found that a mixed results on the success of
ABC after conducting the empirical research. The process of change in management accounting
system is understood by the using the contingency theory of framework and exploring the
rationale for such change. It is indicated by the findings that there is considerable amount of
change in the systems of management accounting of the international companies (Nitzl 2016).
The primary objective of this particular research paper is to make a contribution in understanding
of the change in the system of management accounting. It is provided by the contingency theory
why there is variation in the system of management accounting of different organization in
different settings. The basis of contingency theory of management accounting is that there do not
exist appropriate accounting system that is applicable to organization. It has been identified by
the literature associated with the management accounting that one of the potential indicators of

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the change in the system of management accounting is advancement of technology (Fullerton et
al. 2014).
The contingency theory has been utilized for the examination as a basis of theoretical
study. The main objective of this study was to determine the organizational performance in terms
of impact of ABC using a perspective of contingency. It is specified by the management
accounting contingency theory that it is not possible to have equal application of one accounting
control system to all organization. This is so because different operating environment is faced by
each organization which is required to be evaluated carefully through the strategic planning
process. The structure and strategy including the contingency theory must be fitted into the
management and existing environment for improving the performance (Otley 2016).
A basic contingency model is presented for explaining the relationship to managerial
accounting and structure of organization. It is indicated that the competitive strategy of an
organization is influenced by both exogenous environmental variables and endogenous
organizational variables. Furthermore, to achieve the desired performance in a strategic way, the
managerial accounting practice and structure of organization will be dictated by competitive
strategy. Organization might be influenced by additional factors such as firm size, production
type, product diversity and degree of centralization by additional factors. A link has been
provided between the systems of management accounting such as ABC and performance of
organization as evident from empirical research in the managerial accounting. A positive
relationship has been found between the use of managerial accounting information and
environmental uncertainty. The system of management accounting and control system is affected
by the specification of strategic choice.

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The research work outlines that the management is provided with detailed information for
making decision in terms of elimination of waste, streamlining of the process and cost reduction.
It is assumed by this costing system that there would be improvement in performance due to
enhancement of such method. In addition to this, it is believed by the organizational leaders that
there would be value creation by ABC and the detailed information would lead to improved
performance and cost reduction. It has been found that organizations adopting the ABC tend to
outperform the non adopting organization (Sanford 2009). Profitability is positively impacted by
the cost improvement from the implementation of ABC system. The basic contingency model is
tested in the research paper for determining the ABC impact on performance of organization.
Size and strategy of organization in addition to technology and environment are the most
prevalent contingencies (Wouter and Kirchberger 2015). Furthermore, it has been examined that
the cost management in organization is influenced by the competitive environment.
Such analysis has been examined by collection the sample and data and the researcher
conducted an internet enquiry on the Yahoo and Google search engines. Such results lead to
identification of consultant who works with the organizations employing ABC. The performance
of organization due to the implementation of ABC is measured in terms of debt to equity
management, asset turnover, return on assets, operating performance and earnings per share
(Thomas 2016). For examining the relationship between performance measurement and
independent variables that is regarded as an appropriate technique
One of the samples on in the research was evaluating the implementation of ABC system
and impact on financial performance of BHP Billiton (Search.proquest.com 2018). It was found
that the performance of organization is positively related to the implementation of ABC. In
addition to this, if the organization has low cost strategy, it was ascertained that such costing

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method would help in generating higher performance. With a higher degree of international
competition, the operating environment was found to be complex. For the decision making,
research does not provide adequate information on the costing techniques. The perception of
users regarding ABC implementation was influenced by the mixed results generated from the
research and thereby keeping the organization from abandoning the traditional system of costing.
Furthermore, some of the barriers in the implementation of system of ABC include lack of
resources, lack of commitment on part of management, clarity of objectives, lack of resources,
difficulty in costly driver identification, training and non accounting ownership (Cooper et al.
2017).
It is provided by the result operating performance and return on investment is influenced
by the significant variable that is size of organization. The research contributed to limited
contingency research that was available on management accounting for improving performance
of organization by evaluating implementation of ABC. Hypothesis testing indicated that higher
asset turnover has been generated by the organization and lower earnings per share and market
price (Yigitbasioglu 2016). However, there were no operating differences and strategy of BHP
Billiton compared to any other organization that do not implement ABC method.
Explanation of similarities and differences between the findings of two articles:
The first article has been extracted from emerald publishing that intends to detect
healthcare process efficiencies by the implementation of approach of activity based costing. This
particular research paper outlines the role of management tool in supporting the decision making
process in organization. A remarkable reference is made by study in raising the accounting
system pivotal role in the organizational process of management (Shields 2015). Such paper

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intends in contributing to the literature on the implementation and use of ABC method in health
care organization. Second research paper on other hand helps in determination of impact of ABC
on the performance of organization by relying on the perspective of contingency theory
(Search.proquest.com 2018). Therefore, the first article relies on contingency theory framework
as against second article relies on the cost accounting theory. The methodology of analysis in the
first article is based on case study analysis compared to the second article that used a sample of
listed organization for evaluating the linkage between ABC and organizational performance
(Kihn and Ihantola 2015). Furthermore, second article made use of wide range of statistical tool
such as regression analysis and several tests in the section of methodology.
Research findings useful for the management accounting professionals:
The results that are obtained by the application of ABC in healthcare organization
highlights on the cost information that that would guide managers in detection of opportunities
that would lead to improvement in the care process efficiency. In addition to this, findings
generated from second research paper would help in strengthening the key concepts which the
scholars of accounting management propose. It is indicated by the case study that
reorganizational actions requires to take into account some of the organizational aspect that
particularly focuses on the cost information on resources and activities. In addition to this, some
of the critical areas have been detected by the accounting methodology presented in the given
research paper where linkage is created between processes and cost and seek managers
intervention. In order to manage the productive process in an effective way, the research paper
helps in contributing to provide evidence to translation of theory of cost accounting into useful
models (Järvenpää and Länsiluoto 2016).

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In addition to this, the findings that have been generated from the analysis of the second
research paper on determining the impact of ABC on performance of organization are likely to
continue debate where such costing method implementation leads to improvement in
organization performance. Furthermore, such evaluation also contributes to limited contingency
research available on the management accounting. The study introduces culture of organization
for identifying the objectives and research in generating public information (Andersén and
Samuelsson 2016).
Conclusion:
The report is prepared for evaluating the case presented in the articles that have been
extracted from accounting, management and auditing journals. It can be seen from the analysis of
above articles determining the impact of ABC on performance of organization and detection of
inefficiencies in the healthcare process by using the approach of ABC. Mixed results have been
yielded when determining the impact of implementation of ABC on the organizational
performance. Analysis of the second article depicts that implementation of ABC helps in
identification of difference between radical and incremental reengineering innovations.
Implementation of ABC would enable managers to focus on activities and resources that are cost
consuming. Therefore, it can be inferred from the analysis that there is a considerable difference
between the two research papers.

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