Activity-Based Costing: Impact on Business

The assignment delves into the role of management accounting in businesses, focusing particularly on activity-based costing (ABC). It highlights how ABC accurately reflects resource consumption through organizational activities. The report examines two studies that demonstrate ABC's influence on revenue generation and cost reduction. Finally, it emphasizes the importance of implementing ABC for enhanced business performance.

MANAGERIAL
ACCOUNTING

EXECUTIVE SUMMARY
It helps in encompassing each field of accounting whose objective is to inform metrics of
management's business operations. The present study would discuss about activity based
costing which helps in assigning and determination of overhead activities cost according to
actual consumption. It would be choosing two scholarly articles based on ABC. In the same
series, it will be explaining ABC in detailed aspect with its procedure, significance and
implementation in business entity. It could be reflected by stating that accounting ratio are very
important for gaining financial performance and wealth of business entity. Further, it could be
summed up by giving huge importance for implementing activity based costing which is
beneficial for each business entity.

TABLE OF CONTENTS
INTRODUCTION..............................................................................................................................1
A. Activity Based Costing...........................................................................................................1
B. Purpose of both the studies with their research questions..................................................3
C. Discussion about similarities and differences in context of findings of both the studies......4
D. Stating outcomes and lessons learnt with both the studies with reference to management
accountants...............................................................................................................................7
CONCLUSION................................................................................................................................. 9
REFERENCES................................................................................................................................. 10

INTRODUCTION
Management accounting is referred as the process of analysing, measuring, identifying
and communicating information to its managers for accomplishing goals and objectives of
business entity. It helps in encompassing each field of accounting whose objective is to inform
metrics of management's business operations. Present study would discuss about activity based
costing which helps in assigning and determination of overhead activities cost according to the
actual consumption. It would be choosing two scholarly articles based on ABC. In the same
series, it will be explaining ABC in detailed aspect with its procedure, significance and
implementation in business entity. It will also articulate similarities and variations from the
findings of both studies. Study 1 of this report is “The impact of Activity Based Costing
technique on firm’s performance” and study 2 is “The Activity based cost Hierarchy, Production
Policies and Firm’s Profitability”. Further, it would also specify outcomes and lessons from its
research findings which are useful for various management accountants in context of Australian
companies.
A. Activity Based Costing
It is the method in which overhead costs are assigned to processes or products that
generate or consume value. In other words, it is a way to allocate indirect overhead costs to
products or departments that generate these values in the production process (Activity based
costing, 2018).
It's Objectives:
 With the use of activity based costing method, any company can easily estimate the cost
elements of all products.
 Eliminates products and services which are less profitable.
 This methodology assigns an organization's resource cost through activities such as
products and services which are provided to its customers.
 Support strategic decisions such as pricing, outsourcing, measurement and identification
of process improvement initiatives.
It's Applicability
 It is applicable throughout company for financing, accounting and costing.
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 Applicable to full scope as well as for partial views.
 Helps in identifying inefficient products, activities and departments (Fitó Bertran, Llobet
and Cuguero, 2018).
 Helps in allocating more resources.
 Eliminates unnecessary costs. Assists in fixing price of a product or service with any desired analytical resolution.
Reasons for implementing Activity Based Budgeting
 For better management
 For budgeting and measuring performance
 For calculating costs more accurately
 Ensuring product
 Evaluating investments in new technologies

 Managing costs Responding to increase in overheads
It's implementation in an organization
Firstly, it needs commitment of senior management then it requires visionary leadership
to sustain long term cost effectiveness in the business operations. Hence, it is required that
senior management has comprehensive awareness of how activity based costing works.
Secondly, before implementing it for the whole organization, it is always a great idea to do a
pilot run. Among all pilot run candidates from different departments, whom so ever is best
would be assigned with the department that suffers from profit making deficiencies (Hiebl,
2018).
Lastly, if no cost savings occurs after the pilot study is implemented, it is likely that the
model has not been properly enforced or it does not suit department or company as a whole.
Its procedure
The procedure of activity based costing is stated as below to generate huge revenue:
 Firstly, team which is responsible for implementing activity based costing is identified.
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 This team identifies and assesses the activities that are involved in products and
services.
 Then team selects a subset of activities that should be taken for activity based costing.
 Elements of selected activities are then identified by team that cost too much money for
the organization.
 Identification of fixed and variable cost is done.
 The gathered cost information is then entered to Activity Based Costing software.
 Then calculation and reports are produced by the software to support management
decisions.
 After getting reports, management can identify the steps that should be taken in order
to increase profit margins to make activities more efficient.
The taken steps and decisions after activity based costing experience are generally
known as Activity Based Management (Laviana and et.al., 2018).
Importance
Activity based costing helps in reliability and accuracy for determining cost by laying
special emphasis on cause and effect relationship in incurring cost. It has also recognised its
activities which have concern about cost but not with products which had performed various
activities. It also identifies numerous activities which do not add value to any of the product and
nature of behaviour of cost helps for decreasing cost. Multiple cost drivers are used through
ABC which is fully based on transactions instead of volume of product. It has concern with each
activity in and beyond factory for recording its more overheads as compared to products.
In the similar aspect, it records cost to specific area of responsibility of manager,
customers, responsibility and departments which are beside cost of product. The most
important factor is stated as it helps in decision making of manager which could be applicable
for reliable product cost data. The rate of cost driver and information related to volume of
transaction has been provided which is essential to management for performance appraisal and
cost management for different responsibility centres. It is working only in context of task as it
could take quality decision by knowing each activity's nature. It gives better information of
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costing and helps management for managing finance efficient aspect and to attain appropriate
understanding of competitive advantage of business entity (Wahab, Mohamad and Said, 2018).
B. Purpose of both the studied with their research questions
Study 1 [The Impact of Activity based costing techniques on firm performance]
The initial purpose of this study is to observe whether the documented successful
implementation case study of activity based costing is translated averagely into performance of
superior stock or not. It has reflected choice of management accounting system like ABC which
might give appropriate impact on the value of firm. In the similar aspect, it has shown
information about firms which are adopting activity based techniques and have outperformed
matched with non-activity based costing firms (Kennedy and Affleck-Graves, 2001).
Study 2 [The Activity based cost Hierarchy, Production Policies and Firm Profitability]
The main objective of this study is to investigate its common measures of activity of
manufacturing which are linked to classification of cost hierarchy which is proposed in ABC. It
has also identified the extent to which its operational measures are corresponding to particular
hierarchy for explanation of both; revenue and cost (Ittner, Larcker and Randall, 1997).
Research questions set out for exploring the study:
Study 1
 Is the activity necessary?
 Is the activity performed in efficient manner or not?
Study 2
 At what extent, common measures of manufacturing activities are corresponded to
classification of cost hierarchy?
 How association among classification of cost hierarchy is affected through production
policy of firm?
 At what extent, cost hierarchy classification helps in explanation for variations among
profit, revenue and cost?
C. Discussion about similarities and differences in context of findings of both the studies
Findings of study 1
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In context of earning profit, it has examined the relationship among adoption of activity
based costing and value of shareholder via raised margin. The organization which has adapted
ABC has outperformed FTSE index by approx. 20%. They failed for capturing risk differences
which had elaborated superior performance of ABC firms. It has signified minimum variations in
the performance of specified two groups in study. In the similar aspect, they have observed
performance of ABC firm which replicates superior operating performance with sum of
attaining good return of stock performance. There is huge preference for measuring
performance on the basis of operating income instead of earnings as they concede
inconsequential choice. They had laid special emphasis on two accounting performance
measures, operating profit margin and return on shareholder's equity. They have also reported
various other accounting based measures for identifying the drivers of difference which were
observed in performance of stock market.
With review of measure on the basis of accounting, it has confirmed about the best
performance of ABC business entity. It had suggested on the basis of debt ratio that activity
based costing should be adopted through firms and it must sustain high leverage profile as
compared to firms with non ABC. Overall, accounting ratio has suggested main features of firm
of Activity Based Costing as cost control, financial management and asset utilization are
contributed for superior performance of business entity. Their main objective for addressing
this concern was about superior performance of firms with activity based costing technique due
to confounding innovation of management as increased new capital and acquisition. While
identifying this activity as percentage of market capitalization of business entity, there is
absence of differences among Activity Based Costing firms along with matched counterparts as
it might be after or before introducing activity based costing. The evidence of return from
superior stock is followed through adoption which recommends perceptions about organization
with justification of financial benefit.
Findings of study 2
In this study, it has examined association within activity based cost hierarchy
classification and relationship among manufacturing cost and classification through time series
data. It has presence of a wide variety of its operational measures which signify measures as it
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is similar to classification of cost hierarchy. It has indicated numerous production order,
processed number of parts and production batches which are directly associated with similar
underlying factor as volume of production which recommends variables as they might be
defined accurately as measured at unit level in this particular operation.
Multiple batches are directly loaded on unit factor, average and variability in batch size
is load on batch. Both loadings are satisfied with claim of management which had captured size
and number of batch with two different dimensions of activity associated with batch such as
fixed set up and variable batch related activity. In fixed setup, activity is traced through
production of numerous batch with requirement of each and other dimension always fluctuate
with size of batch. The fixed activities are directly linked to every batch as these do not vary
from its size along with performance of certain variable activities. There is less requirement of
replenishing and monitoring small batches as compared to large. The analysis of principal
components is indicated according to measures of batch related tasks which reflect distinct
dimension of activity of production.
There are several measures which have presence of high cross loadings on the basis of
two factors. The inventory holding cost is minimised along with introducing innovative raw
material and suppliers with extension of product line. The negative link in between product and
batch is consistent with EOQ model in environment of multi-product which shows sum of
production system as it faces budgetary and capacity constraints for decrement of optimal size
of batch. It had been extracted that unit factor is not associated statistically with different other
factors but batch and product has exhibited appropriate negative correlation as it signifies
various decisions about production. The product offerings and batch size are interrelated as it
provides impact linked operation at different level of cost hierarchy.
It has indicated that there is huge need of purchasing activity for large batches. Batch is
not directly linked with cost in different non production or production cost pools with total
costs. If new production line was introduced which led to increment in short term cost which is
not accounted for alterations in batch size or volume of production. There is a positive
association of product because of great inventory congestion. In simple words, introduction of
new product line is formed with requirement of hiring new planning and managers and
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administrators for considering additional space. Hence, it helps in raising expenditure in
planning and simultaneously, expenses are increased in planning and general administrative
cost pools.
While analysing revenue and profit, it has examined association among organization's
revenue and profit with classification of cost hierarchy. It has recommended that variety of
products with increment in profit and revenue up to the point. It does not indicate association
of revenue with batch level activities as it maintains consistency with model of cost and profit.
They did not find any relation in between revenue and batch. The outcome of unit has indicated
that revenue is increased as more products are sold. In the similar aspect, there is a positive
relation in between product and margin which implies increment in revenue with broad
product line. Thus, classification of cost hierarchy not only gives explanatory power in cost
model but it also provides explanation in alteration of revenue in particular business entity.
Overall, the analysis of profitability helps in implying that increment in cost with alterations in
manufacturing activity has presence of small effect on profitability after accounting on the basis
of increment in revenues.
Similarities and differences
The study 1 and 2; both have performed quantitative analysis for exploring its research
question. Both these studies are focussing on attaining profitability by following activity based
costing. These studies are suggesting activity as in study 1 it adds value of business entity by
proper cost control and for optimising asset which was paired with implications of financial
leverage. In study 2, cost and revenue implications for assessing the performance consequences
of activities are considered which are directly related to hierarchy of cost. Their main aim was
to cut cost and to generate huge profit. In study 2, it has focused on unit cost and in study 1, it
has reflected superior market return through shareholder’s value. Manufacturing activities are
considered with batch production in study 2 and similar overheads in study 1.
D. Stating outcomes and lessons learnt with both the studies with reference to management
accountants
Study 1 Study 2
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They had laid special focus on its two measure
of performance of accounting, return on
shareholder's equity and margin of operating
profit. They have also reported different
accounting based measures for identifying
drivers of difference for tracing performance
of stock market. By reviewing accounting
based measures helps in confirming superior
performance of firms who have applied
activity based costing.
It has also justified financial benefit with
superior stock return. In the similar aspect,
long term performance was examined without
need of date when market fully and
immediately understands its implication of
adoption of Activity based costing. This might
lead to decrease in value of business entity.
Activity based costing had gained considerable
attention with context of capability of non-
volume related activities for explanation of
behaviour of cost and perceived value of
organization's activity based systems. Cost
analysis plays very important role for
management accountants as they plan and
communicate financial strategy to its whole
organization for gaining benefit.
It had recommended for improvements in cost
drivers which are executional and might yield
great productivity advantages. With context of
offsetting revenue and cost effect of measures
of cost hierarchy has suggested moving away
by laying emphasis and role of activity based
in process of decision making along with
determination of overall profitability.
Outcome of study 1
Superior performance is significant for net and operating profit margin along with asset
turnover ratio. The ratio of debt has been compared with suggestion of adopting ABC and to
sustain high leverage profile as compared to firms with non ABC. From accounting its
accounting ratio it had recommended asset utilization, financial management and cost control
with its features of activity based costing as it had contributed to superior performance of
business entity with ABC. They have used accounting based information test for knowing stock's
over or under performance with context of market return.
They had provided empirical evidence for adopting ABC as it had raised relative
performance of firm with context of accounting and market based measures. The magnitude of
market performance which is raised and it is statistically and economically significant. The
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superior performance of firms who have adopted ABC has provided tangential support to study
which is related to benefits and impact of ABC.
With significance of various corporate events for duration of adopting ABC for both
firms which are matched to its counterparts. This had addressed concern of superior
performance of ABC which might be management innovation, acquisition and raising new
capital. It had documented both numerous firms which are directly involved in every activity
which is expressed in percentage of business entity's market capitalization. There is absence of
evidence of significant variation among ABC and non ABC firms which are involved either after
or before adopting this technique.
Outcome of study 2
With context of production activity, as it has adjusted high mean as compared to non-
production activity. The total cost is raised with numerous unit related cost driver with its
offerings as it has raised individual cost pool expenditure along with size of batch and variability
in its size. It is aggregated to different operation research model which helps in indicating
consequences of applicability and performance of level of cost hierarchy which varies with
policies of inventory and production. It had recommended that analyse of cost driver should be
customised with manufacturing environment.
There is possible explanation about associations which are limited among cost and
measures of non-unit and spending is not adjusted for matching resource consumption of
particular activities. It had limited outcome with context of operation. Planning, accounting and
marketing activities are directly charge to administrative and general account. Further, the
stated cost in accounts instead G&A must reflect closely for consumption of resources related
to operations. The number of offerings of product was considered as significant predictor of
both total revenue and costs.
CONCLUSION
From the above report, it has been concluded that management accounting plays a vital
role in any business entity. It has shown activity based costing which signifies actual
consumption through organization. It has been articulated that numerous firms are looking for
cutting cost but simultaneously to earn profit in increment aspect. Furthermore, study 1 and 2
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have reflected to generate revenue with their basic implications. It could be reflected by stating
that accounting ratio are very important for gaining financial performance and wealth of
business entity. Further, it could be summed up by giving huge importance for implementing
activity based costing which is beneficial for each business entity.
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REFERENCES
Books and Journals
Fitó Bertran, M. À., Llobet, J. and Cuguero, N., 2018. The activity-based costing model
trajectory: A path of lights and shadows. Intangible Capital. 14(1). pp.146-161.
Hiebl, M. R., 2018. Management accounting as a political resource for enabling embedded
agency. Management Accounting Research. 38. pp.22-38.
Laviana, A. A. and et.al., 2018. Retroperitoneal versus transperitoneal robotic-assisted
laparoscopic partial nephrectomy: a matched-pair, bicenter analysis with cost
comparison using time-driven activity-based costing. Current opinion in urology. 28(2).
pp.108-114.
Wahab, A. B. A., Mohamad, M. H. S. and Said, J. M., 2018. The Implementation of Activity-based
Costing in the Accountant General’s Department of Malaysia. Asian Journal of
Accounting and Governance. 9.
Articles
STUDY 1: Kennedy, T. and Affleck-Graves, J., 2001. The impact of activity-based costing
techniques on firm performance. Journal of management accounting research. 13(1).
pp.19-45.
STUDY 2: Ittner, C. D., Larcker, D. F. and Randall, T., 1997. The Activity-based Cost
Hierarchy. Production Policies. Journal of management accounting research. 9(1).
pp.143-162.
Online
Activity based costing. 2018. [Online]. Available through:
<https://www.referenceforbusiness.com/small/A-Bo/Activity-Based-Costing.html>.
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