Managerial Accounting - Solved Assignment

Managerial Accounting
Managerial Accounting
Tri-semester 1 2018
Individual Assignment
Holmes Institutes
Student Name
Date
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Executive Summary
This report has been prepared Based on a request by the Bega Cheese limited board of
directors. It is aimed at evaluating the firm for appropriateness of the ABC model, in the
report, we have given a highlight of Bega Cheese, its business operations, strategies,
missions as well as objectives. In addition, the report highlights basic aspects of ABC model
including its features. Afterward, an analysis was done on the ABC's application to the Bega
Cheese organization and recommendations given. We have recommended that the
company should consider putting in place the ABC system. To facilitate this the company,
need to develop a data collection structure that t will assist record the activities of the firm
for the purpose of allocating the costs conveniently. Finally, it has been suggested that the
company consider the use of break-even analysis as a way of understanding its sales level
and the volume that will effectively cater for the company costs.
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Contents
Executive Summary....................................................................................................................2
Contents.....................................................................................................................................3
Introduction...............................................................................................................................4
ABC and its features...................................................................................................................4
Breakdown of the ABC model................................................................................................4
Defining activities in the ABC model......................................................................................5
Features of ABC model...........................................................................................................5
How the ABC model aligns with the current goals and strategies of Bega Cheese Ltd.............6
Company missions and objectives.........................................................................................6
Company corporate strategies...............................................................................................6
How ABC model assist in achieving Bega Cheese Ltd strategies............................................7
Recommendations.....................................................................................................................8
Other management accounting tool suitable for Bega Cheese Ltd...........................................8
Conclusion..................................................................................................................................9
References................................................................................................................................10
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Introduction
As a professional cost accountant, I was appointed by the directors of the Bega Cheese
limited to evaluate the firm and assist explain how the Activity Based costing model can
improve the management accounting information that is available to the top management.
This report will, therefore, evaluate the structure of Bega Cheese limited in relation to the
features of ABC model. Afterward, an analysis will be done regarding the suitability of ABC
model to the firm and recommendations made.
Bega Cheese limited in a dairy company which is based in Bega, New South Wales Australia.
The firm was founded as an agricultural cooperative under the ownership of dairy suppliers.
In 2011 the firm was transformed into a public company and was listed on the Australian
Securities Exchange. Majority of the company shares are held by the Bega's farmer
suppliers. The company's major source of revenue is the retail of cheese and processes
cheese products under the Bega brand. Other brands by the firm include Tatura, Royal
Victoria, Dairy Mont, and Melbourne. The firm exports its products to over 40 nations across
the globe. The firm also retails core dairy products which include cream cheese, cheese, and
powdered milk. This contributes up to 40% of their trading revenue (Beitz, 2017).
ABC and its features
Activity-based costing is a method applied in cost accounting to identify the activities
performed by a firm and then assign the overhead costs to products based on those
activities. The ABC model takes in to account the relationship between activities, costs and
the products. Using this relationship, the overhead costs are assigned to products in a less
arbitrary manner than in the case of traditional costing methods (Douglas, 2002). There are
a number of costs that are complex to assign under this model. For instance, indirect costs
like management and office staff salaries are normally complex to assign to a given product
unit. Due to such complexities, the ABC technique has found a niche in the manufacturing
sectors.
Breakdown of the ABC model
The ABC costing is most popular in the manufacturing sector due to its ability to enhance
the reliability of cost data. With this, the model is able to produce an almost exact estimate
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of the costs and allows for effective classification of the costs incurred by the firm during the
production phase. The costing model is applicable in product costing, target costing, analysis
of customer profitability, analysis of product line profitability as well as pricing of services.
The vital role of costs in developing better corporate focus and strategies have made the
ABC applications to be popular in most organizations (Hilton, 2006).
Defining activities in the ABC model
The ABC model is based on activities. In this scenario, activities are defined as a unit of
work, events or tasks which are designed for a unique goal. These goals may be setting up of
machines for processing, distributing final products, operating machines or product
designing. The activities utilise the indirect costs and are regarded as cost objects.
The ABC model can also consider an activity as any event or transaction that drives cost (a
cost driver). A cost driver which is also termed activity driver is the allocation base.
Examples include maintenance requests, purchase orders, production orders and power
consumed (Blocher, 2006).
There are two categories of measuring activities one is transaction drivers, this entails
counting the number of times an activity occurs. Then there is the duration drives, this
measure how long an activity takes to complete.
The ABC system classifies activities into five broad groups that are to some extent not
related to the number of units manufactured. These levels are consumer level activity,
organisation sustaining activity, batch-level activity, unit-level activity and product level
activity.
Features of ABC model
The characteristics of the ABC model are explained in brief below:
o It divides the total cost into two broad components fixed and variable cost. This
assist provides quality information necessary for designing a favourable cost system
in a manufacturing environment.
o It defines the cost behaviour patterns in a proper manner.
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o The behaviour of the cost patterns is related to the volume, events, time and
diversity.
o Before an overhead can be allocated to a product, the responsible cost driver is first
identified.
o The cost drivers are responsible for the pattern of cost behaviour How the ABC
model aligns with the current goals and strategies of Bega Cheese Ltd (Cokins, 2006).
How the ABC model aligns with the current goals and strategies of Bega Cheese Ltd
Company missions and objectives
Bega Cheese is a dairy company that has withstood the test of time to become a household
name in Australia. In its bid to keep serving quality within Australia and beyond, the
company mission is to work together with the various stakeholders in the farm with an aim
of creating and delivering delicious dairy and food products to the globe.
In persuasion of this mission, the firm has a vision of being regarded as an iconic figure and a
popular Australian food processor. The company has embraced challenges and continuously
strived to seek improvement through innovation while at the same time maintaining close
ties to their heritage as well values to the community and consumers. With this, the
company is focused on achieving its goal of being the favourite food producer in Australia.
The firm aspires to make their products the first choice among the consumers. By strongly
focusing on the needs of the consumers, positive supplier relationship and safe and
energised workforce the firm has set a cornerstone for propelling its growth (Bega Cheese
Limited, 2018).
Company corporate strategies
In a bid to fend off strong competition in the food industry Bega cheese have formulated
and implemented several strategies which have seen the company rise to a household name
in Australia as well as strengthen its global influence. Some of the strategies that the
company employ include:
Expansion of its activities in the Asian market. Up to 2011, Bega cheese was focusing on the
domestic market with very minimal export activities. This scenario changed when the firm
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merged with Tatura Milk Industries. Following the merger, the company invested in new
brands and infrastructure to take advantage of the opportunities available in Asia, Oceania
and the Middle East. With this strategy, the firm has managed to expand its revenue
tremendously with the organization currently supplying its products to over 40 nations
worldwide (Australian Trade and Investment Commission, 2017).
Innovating new products and services. Through constantly coming up with new brands of
tasty food products the firm have managed to secure new consumers as well as retain the
loyalty of most of its consumers. This way the firm has increased its production units, an
aspect very effective in building economies of scale. Such steps have assisted the form to
reduce the fixed cost per unit. By concentrating on research and development, the firm is in
a better position to keep off its market from new entrants.
Building a strong supply chain, through the building of a strong supply chain. The firm has
managed to supply its products domestically and internationally. This supply chain ensures
the company's products are constantly available to its loyal consumers.
How ABC model assist in achieving Bega Cheese Ltd strategies
Activity-based costing can improve the costing system in three ways. First, the model
expands the cost pools applicable to assembling indirect costs. Unlike the traditional costing
system that concentrates all costs under one wide pool, the model classifies the costs as per
activity. Secondly, ABC creates new bases for allocating overhead cost. This way activities
that consumed the costs are considered in allocation instead of volume measures like
machine hours (Cokins, 2010). Lastly ABC model alters nature of costs hence making costs
like depreciation, power, and inspection to be traced to unique activities.
Bega Cheese is a manufacturing firm which produces several brands of foodstuffs. ABC
model being most effective in the manufacturing can really be helpful in improving the
company's missions and strategies.
In the firm's aim to expand its international market, there is a need for the firm to have
accurate costing system to be able to eliminate activities that may trigger inefficiencies in its
productions. ABC is rooted in monitoring activities as a way of determining products costs,
this way the model will be very useful in assisting the firm to minimise its production cost so
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as to be affordable in the global market. The nature of competition in the food sector calls
for efficiencies that will assist cut product prices to attract low-income consumers who are
the majority in most of the markets globally (Kumar & Mahto, 2013).
Also, ABC assists identify accurate cost per unit of a product. Being a company that strives to
innovate new brands, its effective that the firm knows the exact costs of the new products
to avoid launching a loss-making item into the market. By using the ABC costing system this
can be made possible. The tracing of costs to the activities utilising them will benefit the
firm by making it easy to price the new products into the local and global market.
Lastly, the firms strive to strengthen its supply chain. This will be made easier by supplying
products continuously at an affordable cost. Since ABC assists eliminate production
inefficiencies and pricing gauze works its will work along in ensuring support to the suppliers
regarding product pricing (Schulze, et al., 2012).
Recommendations
Having studied the strategies goals and aspirations of the Bega Cheese limited together with
the features and application of the ABC model, I recommend the management of the
company to consider implementing the ABC costing system. This tool will be effective in
accurate estimation of the products costs during the manufacturing and marketing phase.
As the firm aspires to maintain its local Australian market while at the same time expanding
its experts, accurate costing will be very vital in making intelligent strategic decisions.
For this to be done in an effective manner the management should consider the issues
below;
o Implement a data collection system to help record the activities taking place from
the product manufacturing to supply of final products in the market
o Develops a structure of the organisation. This way each department's activities can
be recorded with ease for the purpose of allocating costs. Other management
accounting tool suitable for Bega Cheese Ltd
Other management accounting tool suitable for Bega Cheese Ltd
Other than implementing the use of ABC model the firm should also introduce the break-
even analysis tool. This technique is effective in production management. It categorises
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production costs between the variable and fixed components, these costs are thereafter
compared to the generated revenue to estimate the number of sales at which the business
will be at the breakeven point.
The figure below gives an illustration of the breakeven point
Figure 1: Breakeven point (Riley, 2018).
This tool will assist the management to evaluate the level of sales that it needs to attain to
cover the total costs of producing, marketing and selling the product.
Conclusion
Costing is a very sensitive part of an organizations functionality. For the Bega to successfully
remain afloat in the competitive food industry the managers are always called to action in
making and implementing strategic decisions. These decisions can only be helpful to the
firm if they are based on accurate data. This is where ABC model sets in. Bega Cheese being
a manufacturing firm can derive plenty of benefits from the costing system. From analysing
its activities and understanding the cost drivers to the accurate allocation of costs. ABC
model is a tool with a lot of potentialities that Bega Ltd should consider putting in place.
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References
Australian Trade and Investment Commission, 2017. Bega cheese looks to Asia for growth.
[Online]
Available at: https://www.austrade.gov.au/news/success-stories/bega-cheese-looks-to-asia-
for-growth
[Accessed 22 May 2018].
Bega Cheese Limited, 2018. Investors. [Online]
Available at: https://www.begacheese.com.au/investors/
[Accessed 22 May 2018].
Beitz, A., 2017. Bega Cheese helps put dinner on the table, Bega: Bega District News.
Blocher, E., 2006. Cost Management: A Strategic Approach. 5th ed. New York: McGrawHill
Hill.
Cokins, G., 2006. Measuring Customer Value: How BPM Supports Better Marketing
Decisions. Business Performance Management, pp. 13-18. .
Cokins, G., 2010. Implementing Activity-Based Costing, New Jersey: Institute of Management
Accountants.
Douglas, T. H., 2002. Activity-Based Costing: Making It Work for Small and Mid-Sized
Companies. New York: John Wiley & Sons.
Hilton, R. W., 2006. Cost Management: Strategies for Business Decisions. 3rd ed. New York, :
McGraw-Hill.
Kumar, N. & Mahto, D., 2013. A Comparative Analysis and Implementation of Activity Based
Costing (ABC) and Traditional Cost Accounting (TCA) Methods in an Automobile Parts
Manufacturing Company: A Case Study. Global Journal of Management and Business
Research Accounting and Auditing, 13(4), pp. 1-11.
Riley, J., 2018. Operations: Introduction to Break-even Analysis. [Online]
Available at: https://www.tutor2u.net/business/reference/operations-introduction-to-
break-even-analysis
[Accessed 23 May 2018].
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Schulze, M., Seuring, S. & Ewering, C., 2012. Applying activity-based costing in a supply chain
environment. nt. J. Production Economics , Volume 135, pp. 715-125.
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