Activity-Based Costing System Implementation

The assignment is about implementing an activity-based costing system in an organization. It involves analyzing cost drivers to record costs of particular sections and departments. The report summarizes the concept of Activity-Based Costing (ABC) and its benefits in allocating and consolidating costs at a single format and structure. Two journal articles and case studies from Accounting, Auditing and Accountability Journal and Journal of Management Accounting Research are analyzed to support the research. Effective implementation of cost drivers helps determine costs and allocate them as per their cost drivers.

ACTIVITY BASED COSTING

EXECUTIVE SUMMARY
This project summarised to highlight the concept of Activity Based Costing system for
managerial help. Tow researched based articles as Journal of Management Accounting
Research and Accounting, Auditing and Accountability Journal are analysed to elaborate the
ABC system. A case study of Gibson Insurance company and case study on Tork corporations is
carried out to illustrate the ABC system.

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................2
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
a) An explanation on Activity Cased Costing.............................................................................1
b) Purpose of studies opted and set out to explore the topic.......................................................3
c) Similarities and the differences in the findings of the two studies.........................................5
d) Specific outcomes or lessons learned form the studies...........................................................7
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Activity based costing is a type of management accounting system
used to organise functions of business by compressing the cost (Fisher, and
Krumwiede, 2012). A brief introduction of ABC system and importance in
management accounting explained in this report. Two particular journal
articles are selected related to real case scenarios of organisations to
elaborate the concept of Activity Based Costing. Differences between the
findings of the case studies and the outcomes are found that are useful in
management accounting.
MAIN BODY
a) An explanation on Activity Cased Costing
Activity Based Costing
Different businesses uses number of costing models on their domain.
Activity based costing is one of them, in which company identifies various
activities and expenses associated with production or selling of products and
assigned to their cost. Implementation of activity based cost includes
undertaking from senior management as activity based costing needs long
term visionary leadership hence it requires full dedication of the
management and they must be knowledgeable by this process. To
implement activity based costing it is necessary to install appropriate
software for calculations and data storage process. It is a type of accounting
system that prioritize the departmental needs for an product manufacturing
organization. In addition to this, the process includes a few steps as follows-
 Identifying a team to assign the responsibility of listing the activities
associated with products and services in question and make a sub-set
of all activities that have to be considered for activity based costing.
 The team research on the selected the cost and determine fixed costs
and variable cost of activities thereafter the information gathered will
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be entered to the software which will make calculations as a result of
the desired data will occur to support the managerial decision.
 Based on the reports management identifies steps to increase profit
margins in order to make the activities more efficient.
For instance, a product code 324 contains the low volume units that
needs some activities as engineering, testing and type of machines are set
ups to manufacture and reform the small quantities and fulfill the orders.
Another product 466 that contains high volume and manufactured regularly
requires the little supervision due to not having specific activities. By
considering all the relevant aspect the cost allocation will be treated as many
hours. The cost allocation will be based upon the activities carried out in
manufacturing of product 324 due to having multiple activities as set up,
testing and engineering. In opposite the cost of the product 466 do not
contain the various activities and considering the above elements allocation
of cost will be based upon machine hours that are demanded to little
overhead activity. The ABC system will assist organization to overcome the
disadvantages after assigning the overheads and activity running machine.
This is one of the essential part of management accounting system
which helps in consolidating the information related with different cost
equations and situations with the organization. In small and large
manufacturing organization this system plays significant role to attain short
term and long term objective of organization. This helps there is a specific
manner are followed to protect the cost aspects and managing the scale of
various cost standards.
Merits of Activity based Costing
 It provides accurate cost of product by which customers can easily
make the purchase decision.
 Tracing of overhead cost is done through which all the activities can be
observed thoroughly.
Demerits of Activity based Costing
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 It is expensive and complex system to implement than the traditional
costing methods.
 Collection and sorting of data is time consuming and also requires a
specific team for this.
b) Purpose of studies opted and set out to explore the topic
Case study on Gibson Insurance Company
Activity Based Costing helps in dividing the production overhead costs
among the different activities and production functions. There is a case of
Gibson insurance company recorded under Journal of Management
Accounting Research related to implementing the Activity Based Costing
system. Company provide advises and consultancies related to different
components of risk and management (Mark E. Haskins, Kristy Lilly, Liz Smith,
(2017). A particular counselling team and advisory is provided to complex
business and people related to different insurance policies. As per the case
study, user get ideas to implement this managerial accounting system in
organisational context.
This case study provides an overview of using the structure with the
opportunities to advocator to revise the mean through company allocates in
corporate support and the product lines. A particular use and introduction is
defined in clear way in this case study. Allocation of production costs and
units organisation as per the activities based in the related to determine the
cost overheads to different production activities. The case study roams
around three major questions which are
1. Which allocation should be used to relevant activities drivers?
2. Whether it is require to implement new cost allocation policy in
company?
3. Which committee members will remain associated with the initial
implementation program of ABC system?
4. What would be the advantages and disadvantages of this system
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It is seen that the organisation was suffering form the intense
production equations related to produce an equal accounting reports and
managing the sections with simple cost accounting system. Acquisition of
new policies and managements are considered to address the acquisition.
The consequences which were creating difficulties to bifurcate the
production overhead cost resolved after implementing the ABC system.
Major factors which were occurring the difference was the basis of
measurement subject to dividing the cost as per the batch or as per the per
unit cost. The measurement structure is set up by considering the machine
hours standards for particular batch and the actual production of the unit
produce for a specific duration. Cost per dividend was set up per year for
actual production. Cost set-ups, overhead cost as per machine hour are the
main measurement base considered in this report.
Case study on Tork corporation competitive cost analysis
As per Accounting, Auditing, Accountability Journal a case study is
presented in terms of analysing the cost of competitive environment and
the basis measurement of determining the cost basis (Laseter and et. Al.,
2017). This case particularly elaborate the low cost aspect associated with
determining the labour cost and the potential figures related to different
competitive cost analysis based related to more than offset labour saving in
specified product line. The case mainly demonstrate the cost mainly
associated with the labour cost and some product lines.
An organization is having their manufacturing crop in around thirteen
international locations, and also seen as an entrepreneur of eleven
manufacturer names. Whirlpool provides their solutions over one hundred
and seventy nations across the globe. Mainly, their basic solutions are;
laundry appliances, refrigerators and freezers, cooking appliances,
dishwashers etc. This case examines the procurement approach of AES, a
worldwide Electrical power enterprise situated in Northern Virginia. Tork
Corporation Competitive Cost Analysis, it describes the overall transform
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method led by the new chief procurement officer as well as the unique
information.
So as to remain competitive in an market Tork Corporation made
competitive cost analysis with a growing variety of games, companies have
to be able to remain in addition to their costs, and that in their competitions.
Costing is a really stimulating task for an organisation, aren't making costing
faults by heading with wrong presumes. The case exhibits that the cost of
labour is only possible benefit, and the cost of transportation together with
other components may in excess of offset. According to this case study, it
has been analysed that cost of an organization is always fluctuating due to
changes in various other factors. In fact, competition is getting maximized
due to which an association needs to focus on cost cutting strategy by
modifying in current components.
c) Similarities and the differences in the findings of the two studies
The above case studies indicates towards the same scenarios that is
compressing the cost at single format and structure.
Similarities between the case studies
The case of Gibson insurance company was mainly associated with
analysing the cost of particular section and department and another case
study mainly defines the studies related to cost bifurcation and
determination of cost factors dividing according to cost centres (Kuula,
Putkiranta and Toivanen, 2012). Major challenge was occurring in Gibson was to
consolidate the cost at one single cost centre and find out the basis of
distributing of cost in different cost departments. This approach mainly
defines the basic three approaches as accurately assigned to the cost and
direct resources with organisation in various activities. The assignment
approach helps in determining the activities and the amount of resources
consumed while performing activities. A collective data and information
gathered to summarise the cost and dividing the cost in cost drivers.
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The second case study of Tork corporation is associated with analysing
the cost of the competitive cost and drivers that fluctuate the cost and
expenses for various production activities (Dražić Lutilsky and Dragija, 2012). It is
seen that in earlier stage the organisation was ad potting the traditional
costing approach which is centralised around compressing the cost in a
cumulative way rather than electing a particular cost allocation centre. In
predefined manner the number of users and factors main avoided while
calculating the cost and dividing as per their contribution in manufacturing
and production process. The case study is mainly focused around analysing
the factors as cost modelling, scale curves, competitive analysis, cost driers
and operations strategies. Outsourcing was recorded in terms of determining
the competitive cost environment.
Tork corporation manufactures crops in 13 international destinations,
the owner wanted to analyse the cost offering by other competitive
companies. Analysis of outsourcing cost and evaluation of proper cost
analysis was the major part considered in the Tork corporation manufacturer.
The case mainly identifies the procurement approach to AES that is a world
wide power enterprise in Northern Virginia. The cost analysis define the
overall transform method with the new chief procurement offices similar the
essential facts related to competitive market.
One similarity is very common in this both the case scenario that is
lack of basis of cost measurement and allocation. Both the organisations
adhered the ABC costing system to overcome the possible consequences
and the challenges occurred in organising the cost and distributing among
different cost centres. Main objective of the implementing the ABC system in
Gibson insurance company was to calculate accurate cost calculation for
particular cost centre and product line. There are type of policies and the
plans introduced to the company to drive the cost centres and analysis the
managerial risk associated conducting the shared corporate resources and
insurance and annuities.
Differences between the case studies
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The case of Gibson insurance company was related to the calculation
of cost and bifurcating them as per their cost allocation centres Whereas, the
case of Tork corporation was related to the calculation of outsourcing cost.
The cost model was the common in both the case studies which was Activity
Based Costing. Analysis the different scale of curves, cost modelling and the
competitive analysis was the main priorities in Tork case and identifying
different sections of distributing the cost, product line cost, cost allocation to
different cost centres are the was another aspect considered in Gibson case
study (Ruiz-de-Arbulo-Lopez, Fortuny-Santos and Cuatrecasas-Arbós, 2013).
The proactive challenges are also different in both the case studies
which are highlighted in both the case study.
d) Specific outcomes or lessons learned form the studies
Outcomes form Gibson Insurance company
There are type of favourable outcomes carried out after implementing
the ABC system with in the organisation. The aspects are related to
determining the cost in terms of determining the value in various
stereotypes. Following outcomes were carried out as
Avocation of Cost at cost centres: It is analysed that the managers
of Gibson Insurance Companies were unable to determine the cost of
different products and units to calculate accurate cost and bifurcating the
cost in multiple functions. Different cost drivers were found in terms of
deploying the overhead cost as alleviative administration, realisation cost of
saving products, access lending technologies, strength compliance and client
service cost, evolvable futuristic element cost. The above sections were
clearly bifurcated on the basis of different cost aspects. These outcomes
may help Australian organisations to bifurcate the cost basis and
measurement structure of cost of different sectors (Kapić, 2014). These not
only helps in assessing the units and cost of different structure but also helps
in dividing the measurement basis in machine hours, labour cost incurred at
particular department and sector.
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Accurate calculation of cost: favourable outcomes seen in terms of
determining the cost of difference products as cost of loss prevention
services claims services, claims consulting, reducing driver risk (DARRT),
alternative risk financing and human resource and accounting. It is
summarised that type of various cost analysis were analysed with different
sections and departments are considered.
It may assist companies of Australia's to compensate the cost and
dividing the cost in various sections as correcting the fractions of different
cost measures (Monroy, Nasiri and Peláez, 2014). In Australia different type of cost
factors and the analysis considered to compress the cost that may be
reformed and rectified with the existing cost structure. It is analysed that in
manufacturing organisation the cost factors contain the information related
to divided the cost in more relevant and fractional manner.
Outcomes form Tork corporation
Distinguished between the competitive market: key learning
from the case study of Tork case gained in the whole research. It is found
when there are type of options found in competitive environment then it is
required to bifurcate the cost measures structure and divide them in small
units (Tsai and et. al., 2013). The scenarios presents the following scenarios as
analysing the cost of different sections and departments in type of situations
as minimum cost at regional base and intensive analysis of competitive cost
motorists. Its also comprises the outcomes remain related to drive the
transportation cost and cost drivers possibly helps in dividing additional cost.
A subjective results are considered in terms of absorbing the cost of
additional infrastructure and determining the cost of different ventures. ABC
system mainly assisted to derive the cost standards at various cumulative
factors. This case scenario may help the Australian organisations to attain
competitive advantages and summarise the cost in various cost centres. This
theory mainly assist the corporation to corporation in terms of determining
the process of various profit generating approaches.
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Outsourcing cost at minimal cost: In overall analysis it is analysed
that type of cost centres are categorised in terms of summarising the cost at
single format (Öker and Özyapici, 2013). ABC system mainly helps in managing
the operations regarding the determining the plans with different sectors. In
Synchronised way the overall cost is related to derive the changes in more
strategic manner. Main principle is based upon derive the changes with
different product sections. It is analysed that the outcomes are analysed in
threes series as cost analysis, cost driers to conceptual framework and
determination of developing the cost models to support the variable
structure of production activities. It is also considered that in manufacturing
organisations it is effected by considering the cost that properly categorised
in multiple departments.
With this particular case study managers and accountants of Austrian
company would be able to determine the cost drivers to record th cost of
particular section and department. It is analysed that type of infrastructural
cost aspects can reduced the variability of cost structures. In terms of
delivering the basic infrastructure knowledge and structure of cost
measurement become more viable and viable with the organisation.
CONCLUSION
The above report summarise the concept of Activity Based Costing
system which is an essential managerial accounting system helps in
allocating and consolidating cost at single format and structure. There is a
brief analysis of two Journal articles and case studies form Accounting,
Auditing and Accountability Journal and Journal of Management Accounting
Research taken in consideration to support the research. It is illustrated that
effective implementation of cost of different cost drivers helps in determine
the cost and allocate them as per their cost drivers.
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REFERENCES
Books and Journals:
Laseter, T.M. and et. Al., 2017. Tork Corporation: Competitive Cost
Analysis. Darden Business Publishing Cases, pp.1-9.
Mark E. Haskins, Kristy Lilly, Liz Smith, "Gibson Insurance Company", , (2017) ,
https://doi.org/10.1108/case.darden.2016.000134
Kuula, M., Putkiranta, A. and Toivanen, J., 2012. Coping with the change: a longitudinal study
into the changing manufacturing practices. International Journal of Operations &
Production Management. 32(2). pp.106-120.
Dražić Lutilsky, I. and Dragija, M., 2012. Activity based costing as a means to full costing–
possibilities and constraints for European universities. Management: Journal of
contemporary management issues. 17(1). pp.33-57.
Ruiz-de-Arbulo-Lopez, P., Fortuny-Santos, J. and Cuatrecasas-Arbós, L., 2013. Lean
manufacturing: costing the value stream. Industrial Management & Data
Systems. 113(5). pp.647-668.
Kapić, J., 2014. ACTIVITY BASED COSTING-ABC. Business Consultant/Poslovni Konsultant. 6(32).
Monroy, C. R., Nasiri, A. and Peláez, M. Á., 2014. Activity Based Costing, Time-Driven Activity
Based Costing and Lean Accounting: Differences among three accounting systems’
approach to manufacturing. In Annals of Industrial Engineering 2012 (pp. 11-17).
Springer, London.
Tsai, W.H., and et. al., 2013. A product-mix decision model using green manufacturing
technologies under activity-based costing. Journal of cleaner production. 57. pp.178-187.
Öker, F. and Özyapici, H., 2013. A new costing model in hospital management: time-driven
activity-based costing system. The health care manager. 32(1). pp.23-36.
Fisher, J. G. and Krumwiede, K., 2012. Product costing systems: Finding the right
approach. Journal of Corporate Accounting & Finance. 23(3). pp.43-51.
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