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Analysis of Activity Based Costing

   

Added on  2021-06-18

13 Pages3102 Words32 Views
MANAGEMENT ACCOUNTING1

ContentsIntroduction................................................................................................................................3Part A: Activity Based Costing..................................................................................................4Part B: An explanation of how ABC model aligns with the current goals and strategies of thecompany.....................................................................................................................................6i) An identification of the company’s mission and objectives;..............................................6ii) An identification of the company’s corporate strategies...................................................6iii) An explanation of how ABC model assist in achieving the company’s strategies..........6Part C: Recommendations..........................................................................................................8Part D: Apart from ABC model, suggest one other management accounting tool suitable foryour company and justify it........................................................................................................9Conclusion................................................................................................................................11References................................................................................................................................122

IntroductionThis report is prepared for Nick Scali Pty that is operating their business operations in theretail industry in Australia. Nick Scali Pty was founded in 1962 and is engaged in thebusiness of importing and retailing furniture in Australia. Nick Scali Pty has around 47 storesacross Australia and 7 distribution centres as well. In recent past few years, Nick Scali Ptyhas able to increase their sales revenue to great extent. This report is based on analysis ofactivity based costing that is used by many business organisations for costing purpose.Activity based costing method for allocating cost on the most appropriate basis i.e. resourceutilisation basis. Nick Scali Pty’s goals, mission and vision have been included along with adiscussion of how ABC model is aligned with Nick Scali Pty. The recommendation has beenmade for the implementation of ABC model and one more management technique has beensuggested for better cost management and allocation. 3

Part A: Activity Based Costing Activity based costingActivity based costing is based on activities, resources and the consumption patternsinvolved. A cycle of consumption where any activity would consume a resource andcustomers, products consume activities. An accurate understanding of the flow of activitiesand costs associated is needed. Activity-based costing is a refined multidisciplinary approachin which costing of products and services are calculated via the following steps: Step 1: Activity identification involved in the process of production.Step 2: Activity classification as per the cost hierarchy (unit-level, batch-level, product leveland facility level);Step 3: Total costs of each activity need to be identified and accumulated;Step 4: Appropriate cost driver for each individual activity needs to be identified;Step5: Total units of the cost driver as per relevance to each activity need to be calculated(Askarany, Yazdifar & Askary, 2010)The revolutionary edgeEarlier approaches didn’t have such sharp calculations on cost drivers. Cost drivers are veryimportant in understanding the central activity around which the cost incurred revolves. Howmany hours a machine works is what determines the electricity it shall consume and howmuch maintenance cost that shall be incurred. So the number of machine hours is a typicalcost driver which was used in traditional systems. The direct labour hours are another typicalcost driver. Over time complexities and dynamics have changed and the increasing need forspontaneity and innovation have led to many more subtle cost drivers operating which are notthat easy to attribute and so forms the relevance for ABC (The Committee, 2007). Thetraditional costing methods are simple and an over costing or under costing scenario is verylikely.4

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