BUS2002 Management Accounting: ABC System Implementation Case Study

This case study delves into activity-based costing (ABC) and its practical application within the context of 'AM,' focusing on product-line profitability. It elaborates on the development, challenges, and application of ABC, contrasting it with simple/traditional costing systems to prepare product-line profitability reports. The study further explores the new insights that the ABC system provides to AM managers, emphasizing its role in motivating sustainability and better decision-making within the organization. It examines how ABC helps in identifying costs, measuring activity drivers, identifying profitable customers, deciding when to outsource, and setting profit margins, ultimately contributing to the firm's growth and success. The case study concludes that ABC costing is a valuable tool for informed decision-making and sustainable practices.

CASE STUDY
ASSESSMENT 3

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
QUESTION 1...................................................................................................................................3
Elaborate development, challenges and application of activity-based costing............................3
QUESTION 2...................................................................................................................................4
Simple/traditional costing system to prepare a product-line profitability report for AM............4
QUESTION 3...................................................................................................................................5
ABC system to prepare a product-line profitability report for AM.............................................5
QUESTION 4...................................................................................................................................6
New insights does the ABC system in requirement provide to AM managers...........................6
QUESTION 5...................................................................................................................................7
ABC system motivates sustainability and better decision making in the organisation...............7
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
ABC costing is one of the major forms of costing that will enable the company to make the
analysis of the cost and the expenses that would be required to incur by the company with regard
to the production of the item and the product. This is an important concept with respect to
company that would assist in decision making by the company. This report will discuss the
concept of activity-based costing, its development, challenges along with its linking to decision
making. This report also makes a practical exposure through making use of traditional costing
system in order to prepare product line profitability report for A M. At the same time, it has
covered information pertaining to new insight related to ABC system that are required to provide
to AM manager.
MAIN BODY
QUESTION 1
Elaborate development, challenges and application of activity-based costing
Activity based costing
This is one of the major costing system that is related with the activities and operation
which will be added in the overall product. This is costing is related with the activities and
elements which will be added in the overall cost in making the product. It is termed as method of
assigning overhead and indirect cost like the salaries, wages and other expenses towards the
product and services (Quesado and Silva, 2021). As per this costing method all the indirect
expenses will be added to the main product and cost so that the actual price and concerned
expenses in relation with the product will be determined.
Development
As per the development of product and service the ABC costing play an important role
towards the determination of the actual costing of the product and services. This means if the
cost will be identified by the production regarding the production of the product, then it will be
assisted towards the management in determining the profit margin and profitability. This will
lead to play an important role towards the company and the management in terms of making a
smooth operational flow of production activities (Almeida and Cunha, 2017). This concept i.e.,
activity-based costing would lead to determine the management the actual cost that will enable
the managers and the company to determine the pricing decision so that along with the covering

of cost and expenses in the making of the product would be cover but at the same time it will
also enable the company to make earning of the sufficient earning. With the development of
activity-based costing the company would be able to make an analysis of value of the product
along with assisting it towards the decision that would be made by the company (Al Hanini,
2018). ABC costing is considered as better and developed more while making it compared with
the absorption costing. This will also lead to assist the company in terms of taking of most
adequate and right decision that would further lead to play an important role in profitability and
accomplishment of its objective of raising of revenue.
Challenges
The main challenges that the company would face in relation with the ABC costing is
related with the time i.e. it requires a lot of time in collecting and preparing the data that will be
material to the company and the concerned product. In the same way with the aspect of making a
determination of the aspect and element that will add cost to the product would also lead to be
time consuming with respect to company. Another challenge is related with the cost i.e. apart
from making an identification of cost in relation with the product manufacturing the company
may also need to incur a lot of cost in accumulating and making an analysis of the information.
This means the ABC costing would lead to impact the cost structure of the company which may
act as challenge (Araujo and et.al., 2020). In the same way the source data identification that will
lead to add value and cost to the company and its production of the product is also very difficult
to get identified. This means the company need to face challenge in terms of making an
identification of the overhead and other related expenses that are associated with the production
of the products.
QUESTION 2
Simple/traditional costing system to prepare a product-line profitability report for AM
Product line profitability report for AM
Particular
Pottery and
cake
Dairy
product
Meat
product Total
Revenue 55000 60000 62000 177000
COGS 35000 45000 45000 125000
30% of COGS 11000 15100 10500 36600

Total cost 46000 60100 55500 161600
Operating income 9000 -100 6500 15400
Operating
revenue/Revenue 16.36363636
-
0.166666667 10.48387097 8.700565
Particular
Pottery and
cake
Dairy
product
Meat
product Total
Revenue 55000 60000 62000 177000
COGS 35000 45000 45000 125000
Ordering (100*30;25;13) 3000 2500 1300 6800
Delivery (80*98;36;28) 7840 2880 2240 12960
Shelf-stocking (20*183;166;24) 3660 3320 480 7460
Customer support
(0.20*15500;20500;7900) 3100 410000 1580 414680
Total cost 52600 463700 50600 566900
Operating income 2400 -403700 11400 -389900
Operating revenue/Revenue 4.363636364
-
672.8333333 18.38709677
-
220.282
This activity cost is based on the following:
Activity Cost allocation rate
Pottery and
cake
Dairy
product
Meat
product
Ordering
$100 per purchase
order 30 25 13
Delivery $ 80 per delivery 98 36 28
Shelf-stocking $ 20 per hour 183 166 24
Customer support $ 0.20 per item sold 15500 20500 7900
QUESTION 3
ABC system to prepare a product-line profitability report for AM
The ranking of product in terms of relative profitability are:
Simple costing system ABC system
Pottery and cake 16.36%
Meat product
18.38%
Meat product 10.48%
Pottery and cake
4.36%
Dairy product -0.16% Dairy product -672%

The percentage revenue, COGS and activity cost for each product line is as follows:
Particular
Pottery and
cake
Dairy
product
Meat
product Total
Revenue 31.07344633 33.89830508 35.02824859 100
COGS 28 36 36 100
Activity areas
Ordering 44.11764706 36.76470588 19.11764706 100
Delivery 60.49382716 22.22222222 17.28395062 100
Shelf-stocking 49.0616622 44.50402145 6.434316354 100
Customer support 0.747564387 98.87141893 0.381016688 100
QUESTION 4
New insights does the ABC system in requirement provide to AM managers
From the secondary research it has been learned that ABC system that required to AM
manager helps in knowing what all cost has been incurred in manufacturing, designing and
offering products and services to customers so that they can be happy and satisfied to maximum
extend. AM manager being able to identified the relationship between the overhead activities,
cost and manufacturing products that helps in effective identifying and analysing the indirect
cost. Likewise, the manager can easily get information related to management, office staff
salaries and other indirect cost associated in the manufacturing of products and services to
satisfied the wants of customers in effective manner. In order to implement the ABC system the
requirement provided by AM is that its setting up of machine for production, distribution of
finished goods, designing of the products and services and operating machine (Quesado and
Silva, 2021). It also includes the consume overhead resources and cost object related to making
of products for satisfaction of desired of individuals in best possible manner.
Furthermore, the are cost drivers are machine set up, consumed power, quality inspection,
production order and purchased order and maintenance cost. Activity based system helps in
classifying five broad level of activities, unrelated to how many unit are being produced. Such as
unit level activity, customers level activity and product level activity and batch level activity and
many more. So in short it can be stated that there are several things that manager need to be
considered while implement the ABC for maximum benefits such as understanding the number
of resources required in implication, running and managing the ABC (Araujo and et.al., 2020).
At the same time, check whether the cost overweight the benefits that are enjoyed by the
manager to complete and implement the ABC system. In addition to this, require provide to AM

related to whether this helps in effective identification of activities and associated cost or not. At
last it can be stated that whether the ABC contribute in understanding that it helps in increasing
overall profitability of the firm or not.
QUESTION 5
ABC system motivates sustainability and better decision making in the organisation
Activity-based costing is the method of assigning overhead and indirect cost to products
and services for example the utilities and salaries. It focuses on activities to determine the cost of
products and services that company needs to be incurred to fulfil the wants of customers in
effective manner. It provides more accurate method of products or services costing, taking
decision related to price of product so that organisation can earn high profit margin and market
share in external environment. The reason why ABC system motivates sustainability and better
decision making in the firm because it helps in identification of cost that are incurred in
manufacturing of products and services (Zamrud, Abu, Kamil and Safeiee, 2019). Such as
distribution cost, warehousing, raw material and research and advertisement cost that are being
incurred by firm to offer products to customers. Along with it, the ABC system helps in
measuring the activity drivers that helps in allocating actual cost to each and every item for
measuring the actual price or cost that has been paid to make the product. Furthermore, it helps
in taking decision related to identification of profitable customers through identifying the
overhead component or cost incurred in the products such as unusual high customers service
level, marketing, product return handling and many more. So, that less number of issue needs to
be face by customers while experiencing in the company. This analysis helps company in
effectively segregating of unprofitable customers thus organisation can easily planned strategies
to attract the target customers that can be easily part of the firm.
Activity based costing also helps in deciding when to outsource, that is comprehensive
view of each and every cost that is incurred in manufacturing of products. Thus, company can
easily take decision related to the cost that can be outsources so that it can be reduce to
maximum extend. It also helps manager in taking decision elated to setting actual profit margin
of the product and the manner in which the resources should be utilised so that firm can easily
achieve higher growth and success. All this helps in promoting the sustainability of the
organisation through ensuring that the products are being offered to customers at minimum price

possible. In addition to this, different products require different indirect expenses so it helps in its
recognition and allocation of resources for fruitful outcome (Altawati and et.al., 2018.). The
manager can take decision related to cutting back of overhead costs so that maximum value can
be offered to customers at minimum price. Through the activity based costing, companies are
able to effectively set budget for the company that is associated cost that has to be incurred by
company in future circumstances. Finally, it can be summarised that ABC is best system to
contributing in sustainability and decision making for growth and expansion of firm.
CONCLUSION
From the above report it can be concluded that ABC costing is of the major form of costing
that will assist the company in making decision related with the production of products and
services. In the same way this report also summarized various challenges that may lead to impact
the concept of ABC costing. Activity based costing is best method used by many of the manager
to set right price of the product for attracting maximum number of customer within the firm. In
addition of this it is also summarize that how with the implication of ABC costing the company
would be assisted in taking of right decision with respect to its production. At last it can be stated
that ABC system motivates sustainability and better decision making in the organisation through
effectively understanding the actual cost that has been incurred in order to design a particular
products and services for benefits of the organisation.

REFERENCES
Books and journals
Al Hanini, E. A., 2018. The impact of adopting Activity Based Costing (ABC) on decreasing
cost and maximizing profitability in industrial companies listed in Amman Stock
Exchange. Academy of Accounting and Financial Studies Journal, 22(5). pp.1-8.
Almeida, A. and Cunha, J., 2017. The implementation of an Activity-Based Costing (ABC)
system in a manufacturing company. Procedia manufacturing. 13. pp.932-939.
Altawati, N.O.M.T and et.al., 2018. A review of traditional cost system versus activity based
costing approaches. Advanced science letters, 24(6). pp.4688-4694.
Araujo, and et.al., 2020. Use of the activity-based costing methodology (ABC) in the cost
analysis of successional agroforestry systems. Agroforestry Systems. 94(1). pp.71-80.
Araujo, J.B.C.N and et.al., 2020. Use of the activity-based costing methodology (ABC) in the
cost analysis of successional agroforestry systems. Agroforestry Systems, 94(1).
pp.71-80.
Quesado, P. and Silva, R., 2021. Activity-Based Costing (ABC) and Its Implication for Open
Innovation. Journal of Open Innovation: Technology, Market, and Complexity, 7(1).
p.41.
Quesado, P. and Silva, R., 2021. Activity-Based Costing (ABC) and Its Implication for Open
Innovation. Journal of Open Innovation: Technology, Market, and Complexity. 7(1).
p.41.
Zamrud, N.F., Abu, M.Y., Kamil, N.N.N.M. and Safeiee, F.L.M., 2019, August. A comparative
study of product costing by using activity-based costing (ABC) and time-driven
activity-based costing (TDABC) method. In Proceedings of the International
Manufacturing Engineering Conference & The Asia Pacific Conference on
Manufacturing Systems (pp. 171-178). Springer, Singapore.
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