The Significance of Activity Based Costing in Cost Management: A Review of Two Research Studies

This report analyzes the significance of activity based costing in cost management by reviewing two research studies. It discusses the impact of ABC methods on organizational performance and the application of ABC costing in agriculture-based organizations. The report also highlights the similarities and differences between the two studies and the lessons learned from them.

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Table of Contents
Abstract:......................................................................................................................................................2
Introduction.................................................................................................................................................2
Significance of ABC Model...........................................................................................................................3
The two research studies which will briefly discuss the impact of ABC methods are discussed below...5
a. Australian Case study: The application of Activity based costing in agriculture-based organization:
.............................................................................................................................................................5
b. Research study: The effect of ABC costing model on company’s performance:..............................6
Similarities and Differences in between two research paper:.....................................................................7
Similarities...............................................................................................................................................7
Differences..............................................................................................................................................8
Lesson learned from the research study.....................................................................................................9
Conclusion.................................................................................................................................................10
References.................................................................................................................................................11

Abstract:
ABC is an accounting method which firstly identifies all the overhead activities and assign cost
to it and later these costs is finally assigned to product. This method identifies the relationship
existing between the product, cost and overhead activities which helps in assigning cost to the
product more effectively than other traditional methods. Many studies and research have shown
that accounting systems are not consistently applicable and relevant to every organizations
because of their changeable range of operational activities which are practiced by several
companies or organizations. This report will briefly analyze the two articles which uses activity
cost method of costing over the other traditional methods and will highlight its significance in
making key decisions for any organization.
Introduction
This paper basically discusses two research-based journal articles namely “The Impact of
Activity based Costing on Organizational Performance” and “Implementation of the Activity
based Costing Model for a Farm: a case study which is based on ABC model of costing. It
describes the Activity Based Costing method, explains the main purpose of these journal articles
and also discusses what questions they have set out to explore in these two papers (Mahal, 2015).
Moreover, it also discusses about the differences and similarities in the findings of the above two
papers. Besides these it also explains about the 4 specific lessons or outcomes learned from the
research of the two-journal article that will be advantageous for management accountants in
Australian organizations to learn from.

Significance of ABC Model
The ABC is an accounting method which is more logical in identifying and assigning
manufacturing overhead cost to final products than other older methods of allocating cost . ABC
system identifies the relationship between overhead activities, industrial products and costs, and
with the help of these relationship, it allocates indirect costs to goods less illogically than the
traditional approaches. Some expenses are tough to allocate by this process of cost accounting.
ABC is commonly used in the manufacturing companies as it increases the consistency and
reliability of expenses or cost data (Byrne & Torry, n.d.). Therefore, making approximately true
costs and improved categorizing the costs acquired by the organization during its making
process.
The ABC costing method is mainly used in reducing the overhead cost. It’s often useful in more
complex situation which includes more machines, product or the complex process which is
difficult to sort. The first step of the method is to identify the cost which is to be assigned. It is
later followed by several steps like loading secondary, loading primary pool, collecting
information on activity drivers to assign cost in secondary pools to primary pools and then
finally formulating all the information for making final decision. This method includes several
steps. Yet it is more proper and accurate approach of assigning indirect costs to goods or
products and department in an appropriate manner (Cardos & Pete, 2011). There are other
advantages of the model as it enhances the understanding of cost drivers and overheads and
makes non- value and costly adding events more noticeable, permitting managers to eliminate or
decease them. ABC model also enables efficient challenge of costs of operation to find improved
ways to eliminate and allocate overheads.

ABC method helps managerial accountants in assigning overhead expenses to jobs and goods
based on the number of activities required for manufacturing specific goods, rather than making
an estimation of the total sum used by each job (Findler, et al., 2017). Assigning indirect costs in
an appropriate way is vital for management, specifically in cases where the company is
outsourcing various services or is experiencing downsizes. The profitable departments of the
company theoretically should appear less or unprofitable by assigning indirect cost. The
inappropriate or incorrect allocation of cost can affect these profitable departments on which
there is more dependence there by affecting the operation carried out by these departments
(Belton, 2017). It may lead to compounding of issues due to closure of profitable branches or
departments and left ones are unprofitable departments. Closure of branches or department of
company that are profitable causes company incapable to settle or cover its fixed costs.
Outsourcing is also affected by inappropriate distribution of indirect costs (Almeidaa & Cunha,
2017).As for example, due the incorrect allocation of cost, the organization may decide to
outsource an inexpensive operation instead of outsourcing the more expensive operation. In these
cases, outsourcing can actually be expensive.
The ABC improves the process of costing in 3 way: The first step begins by expanding the
number of cost pools which can be used while assembling overhead cost. It does not accumulate
all cost into one wide pool but rather it pools cost through activities. It assigns the overhead cost
to items by creating new bases in such a way that the cost is not allocated on volume measure
rather they are based on activities which generate cost. Lastly, ABC model changes the identity
of various indirect cost which were firstly considered indirect to certain activities. The examples
of these indirect cost are inspection, depreciation, etc.

The two research studies which will briefly discuss the impact of ABC
methods are discussed below:
a. Australian Case study: The application of Activity based costing in
agriculture-based organization:
This study is mainly for identifying ways to apply activity-based model of costing for
agriculture-based organization or farms. The research is similarly directed at inspecting problems
that are linked to application of the Activity Based Costing (ABC) deign in farms. Technical
aspects are thought to be crucial in applying the Activity Based Costing (ABC) design in farms.
The farming production faces substantial problems concerning on costing of the products due to
its exclusive characteristic. This is accepted and taken as a complex problem, mainly for
supervisors in farms along with other groups that works for the production of farming products
(Kannaiah, 2015). The study is significant in identifying the usage of ABC costing model for
organization which is based on agricultural products.
The above study resolves several doubts on ABC method. For instance, it cleared the
concept that ABC model is driven by activities not by the volume. Additionally, it determines the
price of product or resource in two steps. It helps in assigning the price by analyzing all the
problems and difficulties which incurs while pricing the products produced by farms or other
bodies associated with farming (Costing., 2017). Moreover, the research moves out in the
direction of trying to discover issues and problems that are encountered by such farms and other
groups in applying this Activity Based Costing (ABC) design.

b. Research study: The effect of ABC costing model on company’s
performance:
The section will analyze the impact of ABC model costing over the performance of the organization. It is
detailed by the contingency principle of managerial bookkeeping that there is not just a single
governing method of bookkeeping that can be used on all associations in the same manner. Each
association experiences an atmosphere of process that differs substantially from other
associations, and must assess it cautiously by means of a tactical method of planning (Oseifuah,
2014). Agreeing with the contingency principle, super vision of an association must make sure
that the arrangement and tactic fits to the atmosphere that exists, to improve its enactment.
Auditors’ methods of price control are applied for integrating and assisting an associations’
complete tactical purposes, that are aimed at improving its performance in reference to the
Institute of management. This research, for that reason, was carried out to examine Activity
Based Costing (ABC) in defining its effects on the enactment of an association.
This investigative study has a research query, which it arrays out to answer in its
conclusions. For example, it is centered on the research query in case of Activity Based Costing
(ABC) design increases performance of an association (James, 2018) . Incidentally, the research
tries to investigate in what way Activity Based Costing (ABC) design improves performance of
associations that frequently function in competitive and difficult environments. Maximum
number of associations practice the old procedures of bookkeeping, that have several
inadequacies, for instance they do not offer them with tactical and beneficial information to aid
in vital decision making in their existing atmospheres (Alexander, 2016). Because of the dire
necessity for the supervision of such associations to obtain fast, dependable, exact and
appropriate data for making appropriate choices in their dealings, these investigative study
strategies creative tools of management bookkeeping that could be used for such resolves by
means of tactical methods of management.

Similarities and Differences in between two research
paper:
Similarities
The discoveries of the two investigative studies propose that arrangements of
management bookkeeping and cist regulator for example Activity Based Costing (ABC) design
are very important in any association, as these decide in what manner the association works, as a
result improving its monetary performance. The two investigative studies are centered on the
detail that associations face several problems in their working atmospheres, that has considerable
effect and disturbs them in their everyday actions concerning price regulation.
The discoveries of the two investigative studies are likewise similar in that they very
much inspire and recommend associations to apply and use Activity Based Costing (ABC)
design as a vital method of price regulation. The above case on, “the application of activity-
based costing in agriculture farms”, endorses Activity Based Costing (ABC) design as a
methodology that could be incorporated to resolve the pricing problems of farming products.
Similarly, the second research study on, “the importance of ABC costing model on company’s
performance supports and promotes the application of ABC model over other for improving the
performance of an organization.
Moreover, the consequences of the two systematic investigative studies are directed at
providing essential instructions to managerial and cost auditors along with administration of a
firm concerning the profits of embracing Activity Based Costing (ABC) design, its related
application problems and in what way it could improve and make simpler distribution of
overhead prices to methods, works and sections within the association (Wiedemann, 2014). This

is very significant in visualizing out the necessity for carrying out of this design as the chief price
regulation arrangement in associations, for assisting in observing and assessment of overhead
prices.
Differences
As for instance, the findings of the above case study on the application of activity-based costing
on farms or agriculture-based organization were directed to be used by the agriculture-based
organization or farms responsible for producing agricultural products. While, the second research
study on the importance of ABC costing model on Company’s performance discussed on all the
process involve during production which requires costing (Fito & Llobet, 2017).
In addition to these, the case study on the application of ABC costing on farms described
the regulation of price and all the issues associated with its application. In this investigative study,
technical matters comprising information availability and restricted access to resources or dearth are
drawn as the most important aspects impelling application of Activity Based Costing (ABC) design of
pricing for farms and farming based associations (Schmidt, 2018). Then again, the conclusions of the
systematic investigative study “The Impact of Activity based Costing on Organizational Performance”
emphasizes generally in what way Activity Based Costing (ABC) design effects performance of
associations in common. In this systematic investigative study, it has been discovered that associations,
which use this pricing design, are most probable to experience decreased price that causes enhanced
performance of the association.

Lesson learned from the research study:
The lesson learned from the above research are:
I) The research study can assist the cost accountant in understanding all the aspects of activity-
based costing method with an exception that direct materials cover all operating cost (Dichev,
2017). For developing an understanding, the management accountants need to understand skills
required to identify all the activities which are significant for model of costing (Lu & Sridharan,
2016). Planting, pruning, applying chemical or natural fertilizer, watering, weeding, etc. are the
activities which comes under any agriculture farm.
II) In addition, the above study findings help managerial accountants to gain a considerate
understanding of the several challenges and problems that could be confronted during the
execution of the ABC model of costing (Zaman, 2009). For instance, there were several issues
such as limited resources, lack of data while developing this model but the in order to overcome
the same the cost accountant need to come up with several ideas or heuristics required for its
implementation. As for example, assigning cost of activities can be done by using the volume of
sales where the volume can’t be measured even through different ways.
As per the results obtained from the above article which clearly showed the effect of activity
based on costing on company’s performance. The article itself provides a lesson to the cost
accountants on how to manage the cost effectively.
The results of the journal article showed how the cost accountant can analyze the financials
of the company from its income statement by the application of ABC model. Hence, it is evident

that the performance of an organization or firm can be analyzed by studying different ratios like
liquidity ratios, profitability ratios, efficiency ratios and leverage ratios (Kumar & Mahto, 2013).
The results also show that these measures are meaningfully applied by the managerial
accountants to determine hoe third parties like lenders, investors and creditors are interested and
evaluate complete financial performance of a company.
The study of the above journal article is significant for all cost accountant as it assisted them in
finding out which decision can be in the favour of the company and which can be harmful to its
performance. It also helped in finding out, the significance of the ABC model over the other traditional
methods of cost accounting. The study also demonstrated the short comings of old and outdated
traditional costing methods which do not provide enough information required for making key decisions.
The study promotes the use of activity cost method of costing over the other traditional methods as it is
more informative and reliable in decision making than other costing methods (Cardos & Pete, 2014).
Conclusion
Hence from the above discussion, it is evident that Activity Based Costing (ABC) model is a
method that assigns and identifies costs to overhead actions and then allots those expenses or
costs to goods. It is an approach used in managerial accounting. It is a method of assigning or
allocating indirect costs of overheads to the several products or departments within a company,
that assist it in developing the costs through the process of production. The results or findings
from the above two research articles “The Impact of Activity based Costing on Organizational
Performance” and “Implementation of the Activity based Costing Model for a Farm: An
Australian Case” are very important and commonly useful to managerial accountants of many
Australian Organization to understand the importance of applying Activity Based Costing (ABC)
model and leaving old traditional methods that are improper and outdated for crucial decision

making. For example, the findings of these studies assist managerial accountants to find factors
that might influence decision making of any organization whether or not to apply Activity Based
Costing (ABC) model. In addition to these studies are also beneficial to accountants in
evaluating how the financial information from financial statements reported publicly can be used
in examination of fluctuations in the organizational performance, that has resulted from the
application of Activity Based Costing (ABC) model. There are several other advantages of this
model as it enhances the understanding of cost drivers and overheads and makes non- value and
costly adding events more noticeable, permitting managers to eliminate or decease them. ABC
model also enables efficient challenge of costs of operation to find improved ways to eliminate
and allocate overheads.
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