Activity Based Costing Model and its Suitability to Sirtex Medical Limited

Holmes Institute
HI5017 Managerial Accounting
Trimester 1 2018
Individual Assignment
Student Name
Date

Executive Summary
This report is mean to evaluate the Activity based costing model and its suitability to Sirtex
Medical limited. As a company that relies in innovation for delivery of quality services Sirtex
limited is passed the use of the traditional costing system. Its therefore recommended that
the management of the company embrace the activity-based costing system this will assist
allocate the manufacturing costs in a more accurate manner. Such a decision will enhance
proper strategic decision making and implementation.

Contents
Contents................................................................................................................................... 3
Introduction............................................................................................................................. 4
Explanation of ABC and its features.........................................................................................4
Suitability of ABC to the company’s current goals and strategies............................................5
Sirtex Medical mission and objectives..................................................................................5
Sirtex Medial corporate strategies....................................................................................... 6
How ABC can be effective in achieving the company’s strategies........................................6
Recommendations................................................................................................................... 7
Other management accounting tools suitable for the company..............................................8
Conclusion................................................................................................................................ 8
References..............................................................................................................................10

Introduction
Having recently heard about the activity-based costing the CEO of Sirtex Medical limited
approached our firm the Harlequin management consultancy limited for assistance. In this
regard I was appointed as the head of a team which was to evaluate the Activity based
Costing system and give a report on its suitability to the firm. This report is therefore
designed to give a view of the ABC model, its suitability to Sirtex as well as recommendation
to the firm on the way forward. The report will thereafter be closed by a suggestion of an
additional accounting tool that is also appropriate for use by tie firm and its justification.
Explanation of ABC and its features
Activity based costing is a costing system that allocates the overhead costs of manufacturing
to the activities that are associated with the production process. After allocating the
overhead to the activities the costs of the activities are summed to estimate the cost of
making the product (Douglas, 2002). The costing system is based on the notion that
products manufacturing consumes activities while the activities consume resources.
The costing system allocates the overhead costs in a more logical manner if compared to the
traditional costing system. In the traditional costing system costs are simply allocated based
on machine hours. In the activity-based costing system costs are first assigned to the
activities which are the primary cause of the overheads, afterwards these costs are allocated
to the products that had consumed the activities (Hilton, 2006).
For instance, will illustrate the activity-based costing application in a two-product
manufacturing situation within a single company. Product A is a low volume product which
demand some activities like special engineering, several machine set-ups and additional
testing since it is ordered in small quantities. On the other hand, a similar product item B is a
high-volume product which is running continuously. This product requires minimal attention
and no form of special activities. Should a firm allocate overheads in this scenario using the
traditional costing system it might allocate the total indirect costs based on machine hours.
This way very minimal overhead will be allocated to product A since it failed to consume
many machine hours (Blocher, 2006). The result will be product A will be allocated a little
overhead cost than should be the case. This product even though consumed a little,
machine hours, demanded lots of engineering, set-up activities and testing which the