Managerial Accounting: Analyzing Activity-Based Costing Relevance

This report provides an analysis of the relevance of activity-based costing (ABC) in managerial accounting, emphasizing its role in improving decision-making processes within organizations. It contrasts ABC with traditional costing methods, highlighting its ability to provide a more accurate determination of product costs by considering various cost drivers and activities. The report discusses the characteristics of the ABC method, including the allocation of overhead costs and the identification of cost drivers. It also compares and contrasts different articles on ABC, focusing on its importance in competitive pricing decisions and the need for innovation in its implementation. Ultimately, the report concludes that ABC is a valuable tool for businesses, particularly in manufacturing, as it helps in resource control, outcome analysis, and the identification of non-value-adding activities. The report also acknowledges that ABC may not be suitable for all organizations, especially those with significant intangible costs.

MANEGERIAL ACCOUNTING
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Executive summary
It has been observed that the decision-making process of the organization can be smooth and
by the use of activity-based costing method. Hence, it is one of the major tools used by the
organization while analyzing the costs of a particular product or service. Therefore, this
report will help us to analyze the relevance of the activity-based costing system in the
managerial system of the organization which will further help to find the beneficial practices
based on managerial accounting. Various segments upon which the cost depends will also be
analyzed in the report.
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Contents
Executive summary................................................................................................................2
Introduction............................................................................................................................4
Activity-based costing method...............................................................................................5
Characteristics of the activity-based costing method.............................................................7
Allocation of overhead based on activity-based costing approach........................................8
Differences and similarities in the articles.............................................................................9
Usefulness to the banks........................................................................................................11
Outcomes..............................................................................................................................12
Conclusion............................................................................................................................13
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Introduction
After the clear analysis of the business environment, it can be clearly stated that the
manufacturing business are getting diversified and also they are becoming vigorous in
relation to the challenges faced by the organizations (White, 2009). The increasing public
demands and the need for new products and services have created a forced the banks to
provide the best product and service so that the market requirements can be fulfilled. The
banks are trying to improvise new technological methods in their managerial accounting
system so that they can earn money by analyzing the population. These technological systems
will not only help them to improve their skills but also they will help them to work in a much
more efficient manner. The allocation of overhead cost is one of the most important functions
of the managers of an organization (Seal, 2012). If the overhead costs are determined only by
the help of machine hours, then they will not be accurate in nature. The activity-based costing
system uses various cost drivers and pools that are assigned to different activities for the
ascertainment of the real cost of the product. It also helps the management of an organization
to find the reasons behind the increase or decline in the cost of products. The traditional
method that was used by the organizations was a little complex because of the less
information provided by it (Nwanji, 2016).
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Activity-based costing method
This method is one of the most important costing methods that can be used as a replacement
of the traditional accounting model for a precise and accurate determination of the costs of
the different product. This method not only uses the machine hours to determine the cost of a
particular product but it also determines various other sources of a cost that are needed to be
added for determination of the actual cost of the product. Hence, the result of the cost of a
particular product is more precise if calculated by using this method because various
organizational activities are analyzed in order to find the actual cost of the product and the
real consumption made by each activity (Noreen, 2015). Also, it should be clearly
understood that the principle of the activity-based costing depends on assigning different
rivers of costs to every product and service in order to find out its real cost value. Also, it is
clearly stated that each and every good and service can be valued show that the appropriate
cost of the same can be found (Menifield, 2014). The use of activity-based costing method
not only helps the organization to control the resources, but it also helps in analyzing the final
outcomes. Also, when compared to the traditional conventional costing method, it has been
observed that ABC allocates many other overhead costs to the direct expenses which help in
the proper evaluation of the cost (Horngren, 2012).
A person should keep in mind 5 points while analyzing the cost using the activity-based
costing method (Easton, 2010).
• Each and every resource of the organization should be investigated so that the expenses
incurred can be determined.
• Different cost pool should be assigned to the overhead cost in relation to their nature and
affairs. The basic resources that are consumed by the affairs are capital, material, and energy.
• Determination of various cost drivers should be made so that and influence can be made on
the expenses that have been incurred on the products and service.
• Absorption rate should be computed in order to find out the relation of overhead to each
cost pool determined by the management.
• Assigning a cost to different products and services so that the actual cost of the organization
for producing the product or service can be determined.
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One of the major points that should be kept in mind is that the manufacturing businesses
should try and adopt ABC method of Costing but other businesses should try and avoid such
tool in their framework (Datar, 2015). The main reason behind this is that non-manufacturing
organizations are having many intangible costs that cannot be determined because of which
the objective of this method will not be fulfilled. Hence such organizations should try and
adopt traditional methods of accounting that will help them to keep their framework steady.
Also, it should be kept in mind that the traditional methods of accounting for framed in order
to find out the costs of the restricted kind of goods. It has been observed in today's world that
the indirect expenses are very less in number but still, there are many causes that are not
treated in an appropriate manner because of which the task of Costing is not performed
correctly (Datar, 2016).
Nowadays, the organizations have been trying to producer manufacture different type of
products and service in order to expand their business. Many different types of indirect costs
are been incurred by them because of which they are needed to be separated from the direct
costs. The company should also try and eradicate the problems result in the decision-making
structure of the organization so that it can handle the competitive structure of the
environment. There are some costs which are non-volume in nature and are generally
required to track related costs which can only be carried by the implementation of activity-
based costing method in the managerial framework of the organization.
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Characteristics of the activity-based costing method
The major objective that is fulfilled by the activity-based costing is to help the management
to determine the total cost component of the product (Boyd, 2013). There are many causes
that can remain unidentified by the organization which will reduce the price of the product
thus leading the firm to earn less profit. Hence, few features of the activity-based costing
method should also be followed:
• The ABC method of Costing divides the total cost of the product into two categories
termed as a direct cost and indirect cost. The location of each of these costs helps the
management to determine the real cost that has been incurred by the organization while
manufacturing that particular product.
• This is a logical method that can be used by management to allocate the overheads. The
logical reasoning of the process also helps it to make appropriate and reliable for providing
information to the users.
• While analyzing the costs using ABC method, each and every cost related to the particular
time period and the product is to be identified so as to find out any kind of incremental cost
present in the system.
• Another important component of this method is the cost or activity drivers. The
Identification of these drivers is very important for the process of allocation in a given period
of time. Some of the major activity drivers are consumption of power, production orders,
machine setup, etc (Berry, 2009).
Because of the present conditions in the environment, it is very important for the industries to
try and adopt new methods that can enhance the quality of the goods and service to the
organization can maintain its position in the market and therefore address all the future
liabilities with ease (Atkinson, 2012). Hence, the need for the ABC method arises as it will
help the corporate to maintain constant revenues with the help of different costing methods. It
will also be helping the managers in the decision making the process for the eradication of an
affair that is not primarily required. However, it should also be kept in mind that the major
concern of the activity-based costing system is to determine the cost of the product and not to
help in the decision making the process of the organization. Therefore it can be concluded
that, if the proper concentration is being given to each and every activity, the task of
segregating all non-value adding items can be carried out easily.
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Allocation of overhead based on activity-based costing approach
It is a very important factor that the long-term variable expenses are not recognized in
relation to the cost of the product while utilizing the various volume related drivers because
of the complexity and variety present in the short term variable expenses which are needed to
be recognized for the determination of the costs. Some of the short-term variables are the
machine hours, direct material cost, direct labour hours, etc. It should also be kept in mind
that the short term variable expenses are generally changed in volume and not in variety or
complications. On the other hand, the long-term variable expenses are generally not variable
if there is a change in volume variety.
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Differences and similarities in the articles
Importance of the activity-based costing in competitive pricing decisions
It has already been discussed about the importance of the activity-based costing system in the
competitive market. Also, this report helps to analyze the effectiveness of the ABC method of
costing in relation to the price setting in the competitive environment. Harry Potter also helps
to understand the modern theory of accounting and role it is playing in outperforming the
ineffective and inefficient traditional costing systems that are not very suitable for the
decision making the process at a whole (Alvarez, 2013). Also, it can be clearly stated that the
activity-based costing is one of the most innovative and fresh tools for the enhancement of
the corporate and the industries as a group.
Innovation action research
After the analysis of the report, it can be stated that the activity-based costing system requires
a lot of innovation activities for the survival in the competitive environment. It can also be
understood as the need for a fresh system by the management in order to adopt a new view of
the task carried out by the organization. A clear analysis has also been discussed in relation to
the establishment of a fresh Management Accounting theory with the help of the activity-
based costing method. In order to fulfil this function, it is also needed for the researcher to
establish new solutions in an explicit way so that transformation of the present practices can
be made for the betterment of the future. Eradication of the restrictions present in the
traditional accounting systems can only be carried out by the adoption of new a concept like
the activity-based costing so that new and enhanced accounting theories can be applied in the
managerial framework of an organization.
Differences in the articles
Value of the activity-based costing in competitive pricing decisions
It has been clearly stated above that the activity-based costing method will impact the design
of the price setting and cost system of the organization because of the competitiveness
present in the market. It has also been highlighted that the alternative costing processes of
setting prices in the competitive market is also significantly beneficial for the organizations.
However, after a clear analysis of the activity-based costing, it can be stated that the effective
costing approach can help in conducting pricing decisions and profit performance of an
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organization as a whole ((Broad & Crowther, 2001). It should be clearly noticed that research
has been undertaken in order to find out the benefits of these costing methods in relation to
the informative response on the part of markets. In short, it can be explained as the interior
value of information that is being provided to the managers in response to the competitor can
stop to modify the prices on the basis of activity-based costing or not. All, it has been
observed that the performance many organizations have declined because of the
uninformative response from the market and participants in relation to the application of
activity-based costing over the traditional costing methods (Kim, 2008).
Innovative action research
A new innovation theory has been highlighted in the report which will help us to get familiar
to the modern accounting theory is like activity-based costing. A proper analysis has also
been depicted in the report which will help us to analyze if the market conditions will allow
the target audience of scholars and practitioners to adopt the new accounting methods. It can
also be stated that with the help of new and innovative action Research and performances of
the organization the managerial framework of the organization can be improved thus helping
the organization to improvise the revenue. Many loopholes can also be terminated with the
help of these accounting Principles and methods.
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Usefulness to the banks
One of the most important objectives of the bank nowadays has been to collect information
and manage portfolios of different products and customers in the most cost-effective manner.
The bank can only determine its profit after allocating all the costs accurately to the products
and services that have been provided by it to the customers. Most of the banks and Financial
Institutions have tried to implement new types of cost assignment methods which will help
them to reduce the complexity of the activities carried out by them by using minimum
resources.
The activity-based costing method not only helps to allocate different overhead expenses but
it also helps to identify the labour costs of specific activities which will be very profitable for
the organization to determine the cost in the most effective manner. One of the most
important duties of the organization is to calculate all the overhead expenses and then
determine the cost of the product so that the trade can be made successful for both the
customer and the organization. The figures achieved using this method to calculate the cost
helps in fulfilling the strategic objectives.
It has been observed that one of the largest banking institutions of the United States have
implemented the use of activity-based costing in its managerial Framework so that
improvement can be made in the collection of data. This method has not only helped the
Bankers to conduct banking operations but it has also had them to experience a new aspect of
the sector as well.
Many new banking institutions have entered the banking industry which has made it
important for the sector to introduce new costing methods for that the level of competition
can be achieved. the application of these new methods of Costing will not only help the
organizations to improvise their managerial functions but will also help them to make
successful decisions which will further be profitable to the shareholder's interest and the
company at the same time. The use of this method also helps the organization to find the
products which are attractive to customers. Therefore, the activity-based costing system will
help the bank managers in order to understand the demand of customers and those improve
the decision-making process for the profitability of the organization.
The application of the new accounting software in the banking institutions will also help to
conduct small-scale businesses which will be known as Fresh books. It is already having
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more than 5 million users globally and is fulfilling the major objective of tracking and
invoicing of various type of information. In the previous years, it has been observed that a lot
of upgrades are being made in the accounting software’s but the old and classic features are
still intact. Mobile applications have also been launched by the bankers in order to provide
the customers with the best possible service. Direct payment facilities are also being provided
by the banking institutions.
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