Activity-Based Costing: A Review

Contents Introduction 3 About company 3 ABC model and its features 4 ABC model aligns with the present objectives and strategies 5 Mission and objective 5 Corporate strategies 6 ABC model helps in accomplishing Blackmore’s corporate strategies 7 Recommendations 9 Suggestion for management accounting tool 10 Conclusion 11 References 12 Introduction The aim of the report is to talk about the activity-based costing model that is used by the company to reduce the cost associated with each activity of the business. Board of directors of the Blackmore’s limited

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5/21/2018
Blackmore’s limited

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Executive summary
In the era of development, there is an improvement in the management accounting tools that are
used by the companies. The report is based on one of the modern accounting approaches of the
management accounting that is Activity-based costing. The report defines the topic of activity-
based costing and its features. Along with this, it includes how the company can make use of this
technique along with their corporate strategies. This approach helps the company in an effective
formulation of the strategies. In the end, the report includes the suggestion related to another
management accounting tool apart from ABC model that is appropriate for the company.

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Contents
Introduction......................................................................................................................................3
About company............................................................................................................................3
ABC model and its features.............................................................................................................4
ABC model aligns with the present objectives and strategies.........................................................5
Mission and objective..................................................................................................................5
Corporate strategies.....................................................................................................................6
ABC model helps in accomplishing Blackmore’s corporate strategies...........................................7
Recommendations............................................................................................................................9
Suggestion for management accounting tool.................................................................................10
Conclusion.....................................................................................................................................11
References......................................................................................................................................12

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Introduction
The aim of the report is to talk about the activity-based costing model that is used by the
company to reduce the cost associated with each activity of the business. Board of directors of
the Blackmore’s limited which is an ASX listed company hired an accountant who can explain
the details about the ABC model and how this model contribute in improving the management
accounting information of the company. Moreover, the accountant will explain how this method
gets align with the corporate strategies of the company which will make the company implement
this method. In the end, some of the recommendations are given to the company related to the
implementation of the model.
About company
Blackmores is Australia’s leading natural health company who work with the vision of
naturopath and founder Maurice Blackmore. The company offers the extensive range of the
mineral, vitamins and herbal supplements (Blackmores Limited, 2018). Along with the
nutritional foods that use premium ingredients across the world. The company is an ASX 200
public listed company who is having the market capitalization of the $1.5 billion. The group
provides the employment to the 1,000 people across the Asia-Pacific (Blackmores, 2017). The
company is passionate about the natural health and exciting people to ensure that they take
control of and invest in their wellbeing’s.

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ABC model and its features
ABC model stands for the activity-based costing model that is used by the company to evaluate
the cost that is associated with each activity. ABC is an approach to the monitoring and costing
of the business activities that include the outlining of the resource consumption and costing final
outputs (Edmonds, et al., 2016). Resources are allocated to the activities and the activities to the
cost of the objects. This method was first defined in the 1980s by Kaplan and Bruns. This
approach can be considered as the modern substitute for absorption costing and permits the
supervisors to effectively understand the customer net profitability and product (Investopedia,
2018). This model brings the accuracy and reliability while measuring the cost linked with the
activity by focusing on the cause and effect relationship in the cost incurrence.
ABC contributes in tracing the areas which include process, customers, managerial responsibility
and the departments besides the costs of the product. ABC model of management accounting
determines the real nature of the cost behavior that supports in decreasing the cost and
determining the activities which do not add the value to the product (CGMA, 2013). This method
of the activity-based costing model enhances the manager’s decision making and makes their
decisions more reliable for the product cost data (Zimmerman and Yahya-Zadeh, 2011). ABC
model is beneficial for the company as this model provides the cost drivers rate and information
related to the transaction volumes which are essential for the cost management and performance
appraisal of the responsibility centers (Drury, 2013). This cost driver rates can be used by
managers of a company for designing the new products or current products as this reflects the
indirect costs that are probable to be implemented in the costing of the product.
Features

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 ABC model is the accurate method through which the company can analyze the product
and service costing. Along with this, the method is effective for managing the cost linked
with the activity of a business.
 This method provides effective ways through which the company allocate and eliminate
the overhead cost that is associated with the business activities.
 It allows the analysis related to the improved products and the customer profitability
analysis.
 ABC model helps the company in generating the competitive advantage in the market
which is possible with the help of the effective details related to the costing of the product
(Agarwal, 2018).
 ABC model provides the differentiation between the behavior of the cost that is linked to
the activity.
 ABC model is focused towards the activities that can cause costs to increase.
 The model provides the support to the manager’s decision making for the company that is
based on the cost details acquired by the company with the help of the ABC model
(Noreen, Brewer and Garrison, 2011).
ABC model aligns with the present objectives and strategies
Mission and objective
The mission of the company is to become the leading natural health company across the world.
The company is leading company in Australia but now its high time that the company should
expand its business operations.

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The objective of the Blackmore’s company is to expand its business in the market of Asia.
Though, the company is still present in Asia but now looking for the expansion in every country
of Asia. The growth and expansion of the business is the major objective because this objective
helps the company in achieving the vision (Blackmores, 2018). In addition, another objective of
the company is to increase the revenue of the company.
Corporate strategies
The company follows some of the business strategies that help the company in achieving the
objective of Blackmores. The introduction of the new product in the market of Asia is one of the
effective corporate strategies of the company. The introduction of the new product in the market
is the only way through which they can increase revenue, market share and can expand the
business in the new markets (Blackmores, 2017). Along with this, the company decided to
introduce the education program through which they can generate the awareness about their
products and services and makes the customers believes that the products they are offering are
healthy with full of vitamins and minerals. The education program includes the marketing of the
product that is offered by the company.
The company decided to invest the amount in the new infrastructure and commercial relationship
that helps the company in offering economies as a result of new scale. The infrastructure and
commercial relationship are one of the effective ways through which they can make their brand
status more effective.

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ABC model helps in accomplishing Blackmore’s corporate strategies
ABC model supports the strategies of the business because every company needs some costing
model which they apply on their business as this is the effective way for analyzing the cost
associated with the activity of the business.
New product
ABC model helps the company in allocating the resources that will be required for the company
while developing the new product in the market. Moreover, this method also provides the
support through which they can evaluate the cost that is associated with the actions involved in
the introduction of new product. This will helps the company in saving the cost while
introducing the new product in the market. Along with this, the identification of the cost driver
rates will support the company in analyzing the cost that the company will spend in the new
production and designing of the new product (Dale and Plunkett, 2017).
Education program
The education program of the company involves the marketing through which the company can
generate the awareness in the market. Activity-based costing model will help the company while
performing the activity of marketing as include the cost. The model will evaluate the cost that is
associated with the marketing of the product. If all the activities include any overhead cost that
the results of the program reflect that cost is more than the benefits but the implementation of the
ABC will help in reducing the cost (Nagle, Hogan and Zale, 2016).
Investment in Infrastructure

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Activity-based costing model will help the Blackmore’s company while investing the amount in
the infrastructure through proper allocation of the resources. This is the way through which the
company can get the improved results.
The overall analysis reflects that ABC model supports the strategies of the Blackmore’s
company. Moreover, the company should implement this model if they want to bring the change
in the organization and wants to save the amount (Weygandt, Kimmel and Kieso, 2015).

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Recommendations
It is recommended to the company to implement this method management accounting tool when
they want to bring the changes in the organization costing method. The manager of the
Blackmore’s company needs to evaluate that their existing models of costing are working
effectively or not. If the managers found the existing model of costing are not working
effectively then they can implement the ABC model of management accounting.
Along with this, it is recommended to the company to monitor, control and evaluate the
operations of the business after implementing the ABC model in the company. ABC model
implementation is effective or not for the operations is essential because this will help the
company in identifying the loopholes due to which this method of management accounting is not
working effectively.

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Suggestion for management accounting tool
It is suggested to the company that they can also implement flow chart analysis tool apart from
the ABC model in the company. The flowchart analysis is an effective tool that is used to
identify the way through which the process is done by the company. There are different
companies who make use of the flowchart analysis because this method of accounting
management is used for the continuous improvement of the company (Hörisch, et al, 2015). The
advantage of this analysis is that it permits the understanding and examination of the
relationships in a process. Moreover, this will help the company in determining the areas where
the procedure is violated.

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Conclusion
In the end, it can be concluded from the above research and analysis that ABC method is a well-
known method that is used by the many companies because they want different ways through
which they can reduce the cost that is associated with the activities of the company. This is the
way through which they can achieve their objective. The Blackmore’s company can make use of
this model because it will help the company to achieve the strategies and will provide the
benefits in terms of the resources and the cost that the company allocates in every activity. The
alignment of the company’s strategies with the ABC model reflects that this model is cost-
effective for the company.

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References
Agarwal, R. (2018) Advantages and Demerits of Activity Based Costing (ABC) [Online].
Available from: http://www.yourarticlelibrary.com/accounting/costing/advantages-and-demerits-
of-activity-based-costing-abc/52617 [Accessed on 21st May 2018]
Blackmores (2017) Annual Report 2017 [Online]. Available from:
file:///C:/Users/Nidhi_Absas/Downloads/2017%20Blackmores%20Annual%20Report
%20(1).pdf [Accessed on 21st May 2018]
Blackmores Limited (2018) About Blackmores [Online]. Available from:
https://www.blackmores.com.au/about-us/company-information/about-blackmores [Accessed on
21st May 2018]
Blackmores Limited (2018) About us [Online]. Available from:
https://www.blackmores.com.au/about-us [Accessed on 21st May 2018]
CGMA (2013) Activity-based costing (ABC) [Online]. Available from:
https://www.cgma.org/resources/tools/essential-tools/activity-based-costing.html [Accessed on
10th May 2018]
Dale, B.G. and Plunkett, J.J. (2017) Quality costing. New York: Routledge.
Drury, C.M. (2013) Management, and cost accounting. New York: Springer.
Edmonds, T.P., Edmonds, C.D., Tsay, B.Y. and Olds, P.R. (2016) Fundamental managerial
accounting concepts. McGraw-Hill Education.

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Hörisch, J., Ortas, E., Schaltegger, S. and Álvarez, I. (2015) Environmental effects of
sustainability management tools: An empirical analysis of large companies. Ecological
Economics, 120, pp.241-249.
Investopedia (2018) Activity-Based Costing - ABC [Online]. Available from:
https://www.investopedia.com/terms/a/abc.asp [Accessed on 10th May 2018]
Nagle, T.T., Hogan, J. and Zale, J. (2016) The Strategy and Tactics of Pricing: New
International Edition. New York: Routledge.
Noreen, E.W., Brewer, P.C. and Garrison, R.H. (2011) Managerial accounting for managers.
Germany: McGraw-Hill Irwin.
Weygandt, J.J., Kimmel, P.D., and Kieso, D.E. (2015) Financial & managerial accounting. New
Jersey: John Wiley & Sons.
Zimmerman, J.L. and Yahya-Zadeh, M. (2011) Accounting for decision making and
control. Issues in Accounting Education, 26(1), pp.258-259.