HI5017 Managerial Accounting: Activity Based Costing (ABC) Model and Enterprise Risk Management (ERM) for A2 Milk Company

This report examines the implementation of the Activity Based Costing (ABC) model for A2 Milk Company, a listed company on the Australian Stock Exchange. The report explores the features of the ABC model, its alignment with the company's goals and strategies, and provides recommendations for its implementation. Additionally, the report suggests Enterprise Risk Management (ERM) as another suitable management accounting tool for A2 Milk Company, justifying its relevance and outlining its key processes. The report concludes by highlighting the benefits of incorporating both ABC and ERM into the company's management practices, emphasizing their potential to enhance cost efficiency, customer satisfaction, and overall business growth.

HI5017 Managerial Accounting

Executive summary:
Being the senior manager of the company, ABC model is suggested to being implement in the
A2 milk company. In ABC model manager has explained about its feature, and its important
functions. As per the manager, to obtain the company’s goal is the main objective. The manager
has also explained about the strategies and the current goal of the organisation. As per the listed
company ABC model has adopted to improve the functioning and the management of the
accounting. It has also explained about the how to achieve those strategies with the help of ABC
model.
Introduction:
A2 Milk company is the listed company, of the Australian stock exchange. This company has the
large shareholders in the market and also the reputed company of the Australia. This Company
adopts the ABC model, it is the method of accounting in which basically we conclude the
overhead cost of the company and try to reduce its cost. Activity based costing (ABC) deals with
the indirect cost such as office staff salary, management, etc. This method deals with the
relationship of the cost with their product and its activities. ABC identifies the final output of the
costing, to analyse the profit of the company.
a) An explanation of ABC model and its features:
Activity based costing is the method of accounting to determine the cost at each level. It
basically deals to reduce indirect cost or overhead expenses such as rent, salary, staff expense,
etc. This cost id further divided into two parts Fixed cost and Variable cost. Fixed cost remain
same at all level but variable cost changes as per the change in the output. It is the more accurate
and the reliable method to ascertain the cost of the product. The cost is concerned with the
matching cost called cost driver. ABC is the approach to the costing which assigned to cost
object for an effective management.
Features of accounting:

1 ABC model follows the cost behaviour pattern which relate to the things such as time, volume,
events, etc.
2 In ABC method first we analyse the cost of the resources, then we have to allocate that cost to
some specific product.
3 The cost is divided into two parts – Fixed cost and the Variable cost. These two cost are
important for the framework of the accounting. These two cost are design to find out the actual
cost of the company.
4 To determine direct material and direct labour is also the challenging one.
5 ABC method is based on the arbitrary method rate and it is typically used to calculate
Indirect cost to product cost.
6 ABC also find out the cost of each product and the feature of each activity.
7 ABC model provides the useful cost information and reduces or control the cost which is
unproductive. It also helps in decision making and achieves the strategical and operational
activities.
8 To successfully implement of ABC model there should be the support of top level
management. With the help of leadership and strong support, ABC model will work more
efficiently.
9 ABC can’t do the proper functioning without the knowledge of their employees, other sectors
too.
10 ABC model is the is advocated accounting method which is worth while to perform for a new
organisation.
b) An explanation of how ABC model aligns with the current goals and strategies of
the company. This explanation should include:
i) An identification of the company’s mission and objectives:

The main objective of the A2 milk company is to achieve the firms goal and to earn
maximum profit. The ultimate goal of the ABC model is to manage the materials properly
and to serve the economy. Its objective is also to maintain the policies and guidelines which
are adopted by the company. Its main object is to analysis properly the ABC model and
discriminate the items which are more useful, and use those important firstly. Its main
attention is to determine the cost at each level.
The main objectives of the company are:
1 To promote the interest of the buyers and sellers by providing accurate data.
2 To work with full of honesty and give fair judgements.
3 To work with the policies of ABC model
4 To earn profit, and to find the cost at each level.
5 To reduce the cost of overhead expense.
6 To maintain the material and allocate them in a proper way.
ii) An identification of the company’s corporate strategies:
The strategy of the company is to achieve the goals in an effective and efficient manner. The
strategy is to communicate the goals with the organisation, members so that they implement
them in a right manner. A2 milk company, is a highly reputed company so its main strategy is to
attract the customers by reducing the price of the product and by maintaining its quality also.
ABC model helps in reducing the cost of the manufacturing product. The main strategy is to
attract the maximum customers by advertising or any other mode.
Its main strategy is to determine the cost of each activity. The main focus is on the allocation of
cost should be at right path. The material cost, labour cost, overhead cost should be determine
exactly to reduce the final cost. Its main strategy is also to attain the maximum benefit with the
help of the management. The strategy is also to maintain the relationship with the employ. They
have to maintain the relationship of the product with their cost to determine the accurate cost of
the product.
iii) An explanation of how ABC model assist in achieving the company’s strategies:
ABC model is basically deals in manufacturing product so A2 milk company is also a
manufacturing company of milk so its main strategy is to minimise the cost by reducing the
overhead expenses of the company. A2 milk company main strategy is to achieve the maximum
profit by proper functioning of the management. Its main strategy is to reduce the cost of the
final product so that the demand of the milk increases and it will also attract the customers. If the

cost of the product reduces per unit of item then it also helps in to lead the scale of economies.
ABC model assists in finding the cost at each level so it helps to companies to achieve the
maximum goals. ABC model also gives the information about the fixed and the flexible cost so it
also helps the company in allocating the cost. ABC models helps in this globalization market to
compete with the other companies also. This method of cost accounting helps the company to
reduce the cost as well as to achieve the maximum goals of the company.
c) Provide at least two (2) recommendations about the implementation of ABC model for
your company based on your research findings.
Meaning of ABC model:
Activity Based Costing is assigning the cost to each products and service based on its
consumption. This concept was developed in the late 1970s and 1980. This concept was
developed as the traditional concept was failed due to its not giving accurate cost of the products.
This analysis is a process of classifying inventory items based on consumption value.
This concept is total ally made on the concept of Pareto principle which helps in inventory
management. To implement this tool management access the cost and demand information per
item. The benefits of ABC Model that it reduces the inventory management and with that cost it
improves the profits and helps company in attainting its goals.
Category of ABC model:
A: It consist of the item with very rigid and have a high control.
B: It consists of the item with less tightly control and has good records.
C: It consist simplest control with minimal records.
Two Recommendations about the implementation of ABC model:
1. Inventory management: As the ABC model focuses on assigning cost to each product and
services as well as allocation and procurement of cost of products. It helps in maintaining the
huge level of inventory. It not only saves time but also reduces the cost of per unit item.

This process starts with storing, managing, recording and keeping the raw material, overheads
and finished goods of company up to date. It is maintained in that way that whenever any risk
happened in stock items it could be treated well.
2. Reduction in cost/Customer satisfaction: This tool of ABC model focuses on allocating and
procurement of cost of each unit item such that it believes in consumption of per unit item with
its production. Allocating and identifying each item of cost helps in reduction of cost and saves
the time of company. It leads to economies of scale.
With reduced cost of per item value it increases the customer satisfaction with more demand.
This ultimately leads to increase in company goodwill.
In the context of A2 milk company:
This model helps the company to assign its per unit cost which focuses on consumption value of
each unit thereby reducing the cost which leads to customer satisfaction by increase in demand
of goods. Thereby, leading the company to achieve its goals fast. Reducing the cost of
production of goods and services makes the company to make more profits. With that save
money, the company can invest it on some value generating products.
d) Apart from ABC model, suggest one other management accounting tool suitable for
your company and justify it.
The A2 milk company is (ASX listed), apart from ABC model the management accounting tool
which it can used is ERM management.
ERM management: Enterprise Risk Management is used by the enterprises to manage the risk
and identify the threat and opportunity, in order to successfully running of business. It reduces
the enterprise risk with the risk management. It generally rescues the company from the external
risk like strike, lockouts, public violence etc.
Process of ERM management:
1. Identifying risk: risk should be identified as internal or external risk. Internal risk includes
loss of inventory and other factors. External risk consists of strike lockouts and all other external
factors.
2. Risk analysis: risk to be analysed with the enterprise prospect which includes risk creator,
region, persons, area of risk and other factors are included here.

3. Risk evaluation: risk evaluated in terms of risk occurring and major area from where risk
raised. It should be evaluated using the ERM tool it also involves ranking of the risk
4. Controlling the risk: it involves identifying the risk and treatment for that identified risk.
Various options are available for treating the risk as;
 Avoiding of risk
 Retain the risk
 Changing the likelihood of the risk
5. Monitoring/Reporting the risk: It should be done by a standard risk management program or
by the assigned people of the organisation. Every factor where the risk is identified is monitored
and reported to the management authority.
Justification for the Enterprise Risk Management useful for the A2 milk company:
Enterprise Risk Management is an essential tool to be used by A2 Milk Company because this
company is a foreign listed company and risk exposures problems are very less or may be very
much. So, that there must be a risk management control over it.
Enterprise Risk Management if applied in this company will not even identify or control the risk
but it also indemnify the future risk with control features of ERM. So, The company should
adopt this tool in its management tool. It should be conducted by a trained staff or authorised
representative.
Conclusion:
The management accounting tool techniques such as ABC model and ERM approach are
suggested to the A2 milk company. The company by if incorporation of these tools in their
management process can identify, allocate cost, procure cost and saves the unit of time and
money which they could not have done without using this tools which are ABC and ERM. These
are the effective tools to the utilisation of cost effective management, thereby leads to economies
of scale which increases the demand and customer satisfaction. In short helps the company to
grow in every prospect.

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