Comparative Evaluation of Two Studies on Activity Based Costing in Managerial Accounting

This study compares two journals on activity based costing and its use in managerial accounting. It discusses the purpose of the studies, similarities and differences in findings, and lessons learned. The studies focus on time-driven ABC and IT integration with ABC. The first study suggests that TDABC is better for hotel services costing, while the second study emphasizes the need for IT integration and ABC use to align with strategic direction. Subject: Managerial Accounting, Course Code: HI5017

HI5017 Managerial Accounting

Table of Contents
Executive summary.........................................................................................................................3
Introduction......................................................................................................................................3
The purpose of the two studies and their set research question on the cited topic..........................3
Study 1.........................................................................................................................................3
Study 2.........................................................................................................................................5
Similarities and Differences in the findings of the two studies.......................................................6
Lessons learned from the two studies’ research findings................................................................6
Study 1.........................................................................................................................................6
Study 2.........................................................................................................................................6
Conclusion.......................................................................................................................................6
References........................................................................................................................................7

EXECUTIVE SUMMARY
ABC is a simple method to assign indirect, overhead costs into departments or products that
produce such costs inside the production process. The present study shows the comparison of
two selected journals based on Activity based costing, and its use in the related managerial
accounting. The two selected journals are based on two different topics, the first one aims to
study the implementation and application of activity based costing in the hospitality industry as a
whole, on the other hand, the second journal intents to study the integration of information
technology, business strategies, performance and extent of the use of activity based costing. The
prevailing study shows that ABC is used differently in different organizations and industries,
also two of the conducted studies reflect differences and similarities in their key empirical and
findings, by this examination and comparison of both the studies, it is held that in the first study
the firm needs to use the TDABC model to do effective cost calculation, on the other hand, the
second study found that there must be incorporation of plant strategy so that integration of plant
IT /extent of its ABC use does not impact the performance and profitability of the firm.

INTRODUCTION
Activity-based costing (ABC) refers to the managerial accounting method, which helps to trace
the overheads costs into activities and after then allocates it to different activities by making use
of suitable cost drivers. In the present era, manufacturing entities are engaged in the production
of multiple products by implemented several expenses. Therefore the application of traditional
costing technique is not a viable approach. By considering this aspect, various authors have
provided their viewpoint of application of activity based costing to assist management in the
decision-making process by applying accurate cost information (Dale and Plunkett, 2017).
Activity based costing mainly concentrates on identifying the activities of production processes,
which are utilized to process a job for allocating cost instead of allocating overheads by using
single blanket rate. Such individual activities are assembled jointly by way of the considering
processes into a cost pool, and it relates to a single activity cost driver (Gupta and Galloway,
2003).
ABC costing is a more appropriate method of allocating indirect costs than the other methods
(traditional costing). However, computation of this method is complex and as it requires in-depth
information. In order to cope up with the limitations, various researches have been done on the
proposed topic. For a better understanding of the application of activity-based costing present
study aims to make a comparative evaluation of two existing studies, i.e. application of Time-
Driven Activity-Based Costing in a service related company and IT integration and the use of
ABC. Both the concerned studies are based on the application of ABC costing in present era by
considering commercial context as a research base. The present study will initially cover the
purpose of these studies and their set research question on the cited topic. Further, it will evaluate
similarities and difference among the outcome of the research conducted by authors and by
considering that the lesson learned from these studies will be discussed.

THE PURPOSE OF THE TWO STUDIES AND THEIR SET RESEARCH
QUESTION ON THE CITED TOPIC
Study 1
For the effective management of a company, the managerial authorities and the board requires
reliable information regarding operational cost structure as well as profitability to assist them in
making effective decisions. To offer correct information, a cost calculation system is employed
to reflect how the corporate has done the allocation of resources in order to do supply its related
products and services. The present paper aims to consider the application of Time-Driven
Activity-Based Costing in a service related company (Riediansyaf, M.D., 2014). The purpose of
the paper is to discuss on the used research methods, the room cost’s initial calculation, and in-
depth calculation of the cost of the room by making use of the TDAC, and considering a
comparison amid these two approaches Dale and Plunkett, 2017). Along with this, the paper also
states the manner by which the Time Driven ABC method at the organization namely; Graha
Cakra help in producing effective and valid cost information for making decisions as compared
to the conventional approach of costing used by the hotel.
The research cost object is a hotel as well as the Room Division which is the major source of the
revenue of the hotel. In doing so, approx 80% of the revenue of the hotel is generated from the
room rent activity; direct as well as indirect costs are re-computed by making use of Time Driven
ABC method. Further, the outcomes generated from the computation of Time Driven ABC are
compared to the outcomes from the first cost calculation method employed by the company
(Kaplan and Anderson, 2003).
Time Driven ABC has been developed to eradicate the problems and issues held in the
implemented and operations of the ABC system, although the ABC system is costly to establish,
sustain, and modify, and this study aims to consider the shortcomings of the ABC and make the
Time Driven ABC as their initial strength. It is stated that method of Time Driven ABC is more
simple, inexpensive, and solid as compared to the traditional ABC approach, and the same is
buttressed by the (Kaplan and Anderson (2007) with the help of two steps in the application of
the same system as provided as below

First is that this method does the cost calculation of the supply of the resource capacity and then
divides the outcomes by the departmental capacity in order to acquire the department capacity to
retain the rate of capacity cost Dale and Plunkett, 2017). Following to this, the second step is that
the Time Driven ABC makes the use of rate of the capacity cost to foster the resource costs of
the department to the cost objects through the estimation of the resource demand capacity that is
required by every cost object.
However, the inaccurate calculations of costs might lead to the emergence of over or
underpricing which can later impact the competitiveness and profits of the hotel. At present, the
hotels are competent enough to offer accommodation services, as well as a restaurant, laundry,
rental services and so on. Moreover, the research focuses on the calculations of the costs solely
on the room division of the hotel in the present case study. The main rationale of selecting this
aspect is that the room division offered the leading revenue portion in the real-time hotel’s case
study that is approx 80% of the total revenue of the hotel made from the room division (Kaplan
and Anderson (2007).
Study 2
It has been reviewed and revealed by the former research that the mixed results in regards with
the performance of organization gained from the IT integration and the use of ABC, the study
also does the extension of the former studies and makes use of structural equation modelling in
order to consider if or if not the manufacturing plant information technology affects the extent of
the utilization of the ABC and if or if not there is a direct relationship among the integration of
IT, and the extent of the activity based costing use affects the performance of plant by the
reduced costs and strategic aspects for differentiate products (Maiga, 2015).
It is held that the market performance also considerably impacts the profitability; in this aspect,
the information technology can offer better insight into the relevant information for the
managerial accounting systems. (Burns and Vaivio, 2001). Hence, it can be broadly
recommended that there are significant connects among information technology and managerial
accounting systems. (Chapman and Chua, 2000). At the same, it is broadly recognized that the
information technology has a great role in terms with accounting and firms are experience with
issues of proper integration of IT in the managerial accounting practices. By considering this
from a richer point of view, it can be considered that the information technology acts as an

enabler of prevailing management approaches specified to the organization. In a more specific
way, information technology integrated with the databases allows users to determine, understand
and use the data Dale and Plunkett, 2017). The current study has made contribution to the
literature in three key ways; first is that the contribution has been made by the paper by taking
measure to the gap filing among the mature literature on the strategic decisions of business in
context with the lower costs and product differentiation strategy and lately the literature
highlighted on the modern developments held in the information technology as well as
managerial accounting (Ittner and Larcker, 2001).
The second comes in terms with the evaluation of the link among the IT integration and the of
extent of ABC use, plus the potential dominant impacts of the plant strategies over the relation
among the IT integration and extent of the use of ABC, and performance of plant with a structure
offered to show the relation among the IT integration and extent of ABC use and its effect over
the plant performance that is in turn temperate by the plant strategy. Last, the third contribution
by the study to the literature is the suggestion that the theoretical insight for examining the IT
integration/extent of ABC use and the link of performance is required to integrate the plant
strategies as a prime factor when implemented in the concerned sample in the study.
SIMILARITIES AND DIFFERENCES IN THE FINDINGS OF THE TWO
STUDIES
The similarities in both the study lies in that both the studies are focused on activity based
costing, and both the study reflects the advantages of the activity based costing to the different
organization or industry.
The first study focused on the point that the organization needs accurate information in relation
with the operational cost structure and profitability for decision making, in order to get hand on
accurate information, an optimum cost calculation method is needed to do cost and resource
allocation, and the study suggests that the optimal method is time driven activity based costing
which will be more suitable in terms with the requirements of the cited organization, and the
same is to be applied to the room division of the organization which is the most revenue
producing area, and the applicability of the TDABC will drive profitability and performance
(Riediansyaf, 2014).

On the other hand, the second study relates to the aspect that whether the manufacturing plant IT
impacts the extent of the use of the ABC and whether there is presence of direct relationship
amid the IT integration and extent of ABC use, that impacts the plant performance by low costs
as well as differentiated product, which is the main difference among these two studies. The
main difference in both the studies is that first is study is based on a time driven and second is
based on the integration of information technology and the extent of the ABC use (Maiga, 2015).
As the first study is based on the application of time driven ABC and the second one is based on
the impacts of integration of IT and extended the use of ABC over organizational profitability.
The findings of both the study emphasize the role of the leading factors of ABC while depicting
the relationship among the business performance and profitability and activity based costing. It is
also found that more contemporary cost allocation approach which is activity based costing have
been considered to be highly effective rather than the conventional methods in service as well as
manufacturing firms and industries.
LESSONS LEARNED FROM THE TWO STUDIES’ RESEARCH
FINDINGS
Study 1
Thus, the research indicates that the TDABC method is better and can be applied for the Hotel
services costing and also that the rate of capacity cost can be optimally and reliably applied in
the cost compilation. Hence, it is indicated by the study that hotels are required to assess all of
the related costs, direct as well as indirect and then must regain the same by the offered services.
By considering the overall study and result analysis, it can be learned by the management
accounting that, the cost calculations with the time driven activity based costing method by
making use of unit time and cost rates of capacity which cab determine cost each minute or
assigned cost per minute in the attainment of the activity accurately and precisely as compared to
the conventional met6hod applied by the case study company (Kaplan and Anderson, 2007).
Also the management accountants should understand that the calculation dependent on the time-
driven ABC method also leads to a cost driver rate being correct as a calculation base for each
procedure. Management accountants and senior management should evaluate the performance

for each activity or any undertaken activity by all departments in a regular manner, so that there
are constant improvements’ thereby making the unit time highly effective (Ozyurek, H. and
Dinç, Y., 2014). Management should also supervise the activities that make use of resources
which are vital to driving the cost-effectiveness and since the initial cost is calculated on the
basis of management judgment, so it is essential for the operators to decrease the rates of hotel
room particularly for junior suite as well as royal suite type and consider more marketing efforts
while covering a larger area to acquire more visitors.
One more strategy and learning to address with low costs of resources needed is that, instead of
removing the supplied resources directly, managers might choose to sustain that capacity for the
growth in future times in integrating new lines of business. From the provided information by the
time driven activity based costing, managers must learn to forecast the amount of the improvised
business that can be addressed by the current capacity.
Study 2
The key outcomes of this study have considerable implications for the company practices as the
investments in information technology integration and the activity based costing is required to be
conducted in aligned with the strategic direction, effective tools, business strategies, requiring an
excessive involvement level in the managerial area. The study also shows that the profitability
held from ABC as well as IT integration is based on the level how they make improvement in
their core strategies and business scope (Ravichandran & Lertwongsatien, 2005). To this note, it
needs the better amount of planning while designing and making an investment in the Activity-
based costing and information technology for ensuring their reliability and validity to the
strategies development (Byrd and et al., 2006).
Managerial authorities can gain better insights and learning from the study that to attain higher
return from their made investments within information technology and activity based costing, in
doing so the management is required to align all the related resources with the strategies of the
business.
Thus, the findings derived from the study make significant contributions and efforts to the prime
literature in terms with IT, ABC and the performance linked and to the debate held on the
organization, that they must focus on a single thing that is cost strategy or differentiation of

product in order to gain success (Porter, 1980, 1985). In this sense, the outcomes of this study
must improvise the confidence of practitioners and users in the business strategy, as an enabler of
the link amongst IT integration, use of ABC and business performance. Further, the study assists
the business management in forming intuitions regarding the means that can drive these
established relationships (Moscove et al., 1999). In addition, the model must assist to give
information to the development of more comprehensive models while helping the future-oriented
future empirical work with various industries, organizations and samples.
Hence, the key empirical and findings derived from the outcomes indicated the support for the
theoretical structure (Chenhall, 2003). However, the integration of plant IT considerably create
an impact over the extent of its ABC use, and these both aspects can also dramatically impact the
lower costs and strategies for product differentiation that ultimately affects performance and
profitability in the marketplace.
Therefore, the speculation that the IT and ABC might improvise the performance indirectly
through the effect on other factors that overall might add value, which is also buttressed by the
research and its implications for the further research, investing more of valuable relationships
held in the business firms.
CONCLUSION
In accordance with the present study conclusion can be drawn that, with the technological
development and introduction of advanced accounting process, business entities had modified
their cost planning strategies. This is done with the objective to improvise their business
decision-making process by considering accurate cost information as the approach of allocation
of overhead by using single blanket rate is not viable. Both the studies have similar findings
regarding benefits of activity based costing for service as well as manufacturing entities.
However, one study is focused on time driver ABC costing method while another study
integrates ABC with information technology. Both these factors hold their crucial position in
business strategies so that viable analysis of different prospects can be done to make better
decisions for the business. By the analysis of both the researches, learning has been obtained that
TDABC method is a suitable method for organisations operating in the hotel industry. It is
because this method considers factors such rate of capacity cost which can be reliably applied in

the cost compilation for deciding to price for various services. Further, second research provides
learning that advancement of technology had affected costing procedures of various businesses.
Therefore, business entities are required to make investments in information technology for
integration of same with the activity-based costing. This approach will align the strategic
direction by making use of effective tools and business strategies that require an excessive
involvement level in the managerial area.

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