Activity Based Costing in Management Accounting - Doc

Management Accounting
Codan Limited
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Executive summary
In the era of competition, the managers of the company make use of different tools of
management accounting so that they can make effective decisions for the organization. The
report includes one of the major management accounting tools that can help the managers of
Codan limited while making the decision. This tool is Activity-based costing model which helps
the company in allocating the cost effectively which is the only way to make the effective
decisions for the company. The report includes the brief description of ABC model and the
strategies of the company.

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Contents
Introduction......................................................................................................................................3
About Codan Limited..................................................................................................................3
ABC model......................................................................................................................................4
Features of ABC model...................................................................................................................5
ABC model supports goals and strategies of Codan Limited..........................................................5
Codan mission and objectives.....................................................................................................5
Codan Limited corporate strategies.............................................................................................6
Increasing the revenue.............................................................................................................6
Profitability and sales of Codan group....................................................................................7
Strategy to maintain a competitive advantage.........................................................................7
ABC model support to accomplish the Codan strategies................................................................7
Recommendations..........................................................................................................................10
Suitable management accounting tool...........................................................................................11
Conclusion.....................................................................................................................................12
References......................................................................................................................................13

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Introduction
The purpose of the report is to explain the top management of the Codan Limited about the ABC
model of management accounting that can help them in managing the information and taking the
appropriate decisions for the company. The effective way to make them understand the ABC
model is an alignment of a model with the current corporate strategies of the company.
Therefore, the report includes brief details related to ABC model and also about the organization.
In the end, the report states the alignment of the strategies with the ABC model and
recommendation while implementing Activity-based costing model.
About Codan Limited
Codan Limited is well-known manufacturer and suppliers of the communication, mining,
detection technology. The company makes use of the technology with the help of which they can
solve the problems related to the communications, safety, productivity, and security(Codan,
2018). The company came into existence in the year 1959 in Adelaide, South Australia. The
company is one of the listed companies in Australian Securities Exchange. The company offers
its products in more than 150 countries (Codan, 2018).

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ABC model
The activity-based costing method is one of the commonly used accounting methods that
determine the activities that are performed by the business and helps the firms in assigning the
indirect cost of the products or services. It helps the company in identifying the relationship
between the cost, activities, and products. All these individual activities get combine like a group
with some similar processes into a cost pool that relates to the single activity cost driver
(Accounting tools, 2017). In simple words, it can be said that activity-based costing supports the
company to allocate overhead expenses to jobs and products based on the amount of the
activities that are needed to produce the goods. Kaplan and Cooper of Harvard business school
have developed this new method of costing that can provide the assistance to the company to
calculate product cost (Dale and Plunkett, 2017).
This is a fact that proper assignment of the cost is essential for any business in case of
outsourcing or downsizing. For instance; if in a business the manager has assigned high cost then
indirectly on paper this will appear as unprofitable for the company on paper. On the other hand,
if a proper allocation of the cost is done by the company and then they are generating the profit
from that activity which means that there is profitability on paper (Jarillo, 2013).
ABC is an appropriate method which is used by the company to assign the cost of products,
services, tasks on the basis of: -
 Activities that go into them
 Resources that are consumed by these activities of the organization.
This method offers different benefits to the company which includes: -

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 This method allows the company to calculate the integral cost price of products more
accurately.
 This method helps the manager to clear the cost drivers of the particular activity. This
ultimately makes the department of a company to find out the improvement in the
production process to make them act more cost-conscious (Drury, 2013).
Features of ABC model
 This method contributes to improve the cost price calculation of the activities performed
by the company.
 ABC model always tells a true picture of the behavior and structure of the indirect costs.
 It reveals the unnecessary cost that is associated with the activity so that the manager of a
company can eliminate those unnecessary costs (Garrison, et.al, 2010).
 ABC model contributes to improve the efficiency of a production process in an
organization.
 The model identifies the accurate cost of the product which is essential to price products
appropriately.
 This model helps the company in identifying the appropriate cost drivers that help the
company in tracing the overhead to a product (Hilton and Platt, 2013).
ABC model supports goals and strategies of Codan Limited
Codan mission and objectives
Mission- The mission of the company is to offer the communication solution that allows the
customers to be heard so that they can protect lives, generate security and can offer the support

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the peacekeeping worldwide (Codan, 2018). Moreover, with approx. 60 years the company has
formed a reputation for the quality, reliability, and customer satisfaction by manufacturing the
innovative and industry-leading technology solutions.
Objectives- The goal of the company is to achieve absolute customer satisfaction which is
achievable through an unyielding focus on the innovative design, quality of product and the
global customer experience which offers customers the uncompromising reliability that they
require for their demanding missions (Codan, 2018). The objectives for the year 2018 are: -
 Emphasis on offering the high-value communication solutions to their customers.
 Forming alliances with the other companies to expand the business in the global market.
 Capitalizing new and innovative products in the new and existing markets.
 Making an investment in the development of new products and solutions (Codan, 2017).
Codan Limited corporate strategies
Increasing the revenue
The company corporate strategy is to an emphasis on the increasing the revenue vase by
transitioning to complete communication solution to loyal customers and also expanding
technology platforms into new attractive and adjacent markets. The company will complete this
strategy through a market appeal with the introduction of the two new handheld tactical radios
(Sentry-V™ and Sentry-H™) not for the customers but for the global military market. Moreover,
the company is making an investment in the products that can help the company in increasing the
range of military customers by offering them attractive and new solutions. Moreover, this
strategy is fulfilled with the help of introduction of new product Cascade™ Land Mobile Radio
(LMR).

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Profitability and sales of Codan group
For Minetec, the company is willing to pursue opportunities that will scale the business to
accomplish the profitability and sales of Codan group. The company can easily accomplish this
strategy by forming the strong relationships with the global miners and most important suppliers
to the mining industry.
The key strategy that helps the company to accomplish its mission is its commitment to
supplying high-quality electronic solutions along with the competitive pricing, excellent
customer service, and on-time delivery. One of the major activities that are behind the success of
the company is continuous improvement.
Strategy to maintain a competitive advantage
Codan Limited strategy for the minelab is to sustain the competitive advantage across the gold,
recreational and countermine markets. This is possible with the help of constant investment in
technology for bringing innovation in the products.
ABC model support to accomplish the Codan strategies
The Activity-based costing model supports the Codan limited to accomplish the corporate
strategies. The company makes use of this method in identifying the accurate product cost. This
is the fact that company has decided to bring the new products in the market which is the only
way through which they can enhance the revenue. The ABC model helps the company in
identifying the actual cost that is associated with the new products that company is willing to
launch in the market. This is the only way through which the company can reduce the overhead
cost and can generate the maximum revenue out of it. The reduction of the cost will help the
company in either offering the products to the customers at low prices for setting a strong

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customer base or they can offer the products at a highly profitable price due to which they
achieve their objectives.
ABC model helps codan in determining the real nature of the cost behavior that helps in reducing
cost and determine the activities that do not add the value of a product. Moreover, this method
allows the manager to control the fixed overhead cost by exercising more control over the
activities which has led to these fixed overhead costs (Weygandt, Kimmel and Kieso, 2015).
ABC model guides manager for tracing the overhead cost that the company will bear while
producing and introducing a new product in the market. ABC traces the cost of managerial
responsibilities, customers, processes and different departments besides the products cost.
Moreover, this tracking of the cost helps the company while making the decisions as these
decisions of the managers totally rely on the product cost data. These are the ways through which
the company can reduce the cost that is associated with the new products or with the existing
one. The activity-based costing model not only supports the company with the new product cost
but also with the additional cost associated with existing products (Noreen, Brewer and Garrison,
2011).
This allows the Codan Company to offer the product at better prices due to which they will be
able to make a strong position in the market. This reputation and position of the company will
help them in forming the strong relationships with the global miners. This shows that the
reduction in cost with the help of ABC model helps the company in accomplishing the Minetec
strategy of a company. Moreover, the company will be able to maintain the competitive
advantage in the market that is one of the ways through which they can easily deal with their
competitors. Furthermore, the company will be able to improve its performance by investing the

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amount on other activities (Pinto, 2010). The amount will be generated by the company with the
help of huge profits or revenue.

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Recommendations
The analysis related to the ABC model and Codan limited reflects that implementation of ABC
model will support the higher level management while making the decisions related to the
company. It is recommended to the company to hire an expert who can implement this tool in the
company. Moreover, the company should ensure that the expert is aware of the operations of the
business.
Along with this, it is recommended to the company to monitor and control the activities after the
implementation of the ABC model in the organization as this is the only way through which
Codan Limited can track the progress or improvement in the activities. Along with this, they will
get to know the proper allocation of resources and cost has been done or not.

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Suitable management accounting tool
The suitable management accounting tool that the company should use apart from activity-based
costing is Target Costing. This method is one of the important methods of management
accounting that is based on the pricing of the product. This method helps the company in
reducing the large cost of the products at the time of the lifecycle of the product (Blocher, Stout
and Cokins, 2010).
Target costing = Target cost assumption – Desired profit margin
Target costing method allows the companies to keep continuous monitoring of the manufacturing
of the product and at that point, only the company make use of target costing to reduce the cost
associated with the product in all the activities initiated from the manufacturing of a product.
Therefore, this method is considered as one of the effective methods of management accounting.

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Conclusion
In the end, it can be concluded that Codan limited should implement activity-based costing in
their business operations as this will help the company in fulfilling its objective for the current
year. Moreover, the achievement of objectives will contribute in the achieving mission of the
company. ABC model helps the company in reducing the cost, effective allocation of cost,
improving the profitability and effective decision making for the organization. Along with this,
after the implementation of ABC, the existing and upcoming projects of the company will get a
benefit. Moreover, the company will be able to make the good reputation and place in the market
which will help to expand the business and to form new alliances with the other companies.

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References
Accounting tools (2017) Activity-Based Costing [Online]. Available from:
https://www.accountingtools.com/articles/2017/5/14/activity-based-costing [Accessed on 10th
May 2018]
Blocher, E.J., Stout, D.E. and Cokins, G. (2010) Cost management: A strategic emphasis.
Includes index.
Codan (2017) Codan Annual Report [Online]. Available from:
http://codan.com.au/wp-content/uploads/2017/09/Annual-report-final.pdf [Accessed on 12th May
2018]
Codan (2018) About Codan Radio [Online]. Available from: https://www.codanradio.com/about-
codan-radio/ [Accessed on 12th May 2018]
Codan (2018) History [Online]. Available from: http://codan.com.au/who-is-codan/history/
[Accessed on 12th May 2018]
Codan (2018) Our Businesses [Online]. Available from: http://codan.com.au/who-is-codan/our-
businesses/ [Accessed on 12th May 2018]
Codan (2018) The Company [Online]. Available from: http://codan.com.au/who-is-codan/the-
company/ [Accessed on 12th May 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.

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Garrison, R.H., Noreen, E.W., Brewer, P.C. and McGowan, A. (2010) Managerial
accounting. Issues in Accounting Education, 25(4), pp.792-793.
Hilton, R.W. and Platt, D.E. (2013) Managerial accounting: creating value in a dynamic
business environment. Germany: McGraw-Hill Education.
Jarillo, J.C. (2013) Strategic networks. New York: Routledge.
Noreen, E.W., Brewer, P.C. and Garrison, R.H. (2011) Managerial accounting for managers.
Germany: McGraw-Hill Irwin.
Pinto, J. (2010) Achieving Competitive Advantage. Prentice-Hall, Upper Saddle River, NJ.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E. (2015) Financial & managerial accounting. New
Jersey: John Wiley & Sons.