Small-Medium Enterprises’ Responsibilities and Activity Based Costing (ABC) or Traditional Cost

Running head: COSTING MECHANISM
The Small-Medium Enterprises’ Responsibilities andActivity Based Costing (ABC) or
Traditional Cost
University Name
Student Name
Authors’ Note

COSTING MECHANISM
Table of Contents
Background of the research........................................................................................................4
Aims and objectives...................................................................................................................5
Research Questions....................................................................................................................5
Research Requirement Discussion.............................................................................................5
Examination of effectiveness of traditional cost accounting (TCA) for SMEs.........................5
Examination of effectiveness of activity cost accounting (ABC) for SMEs..............................7
Benefits of using activity based costing in SMEs......................................................................7
Limitations of using activity based accounting (ABC) in SME................................................8
Literature Review.....................................................................................................................10
Small and medium sized enterprises....................................................................................10
Activity Based Costing........................................................................................................12
Activity Based Costing and SMEs.......................................................................................18
Research Methodology:...........................................................................................................18
Research Onion:...................................................................................................................19
Research Philosophy:...........................................................................................................20
Research Approach:.............................................................................................................21
Stating the kind of research that is intended to carry out:....................................................22
Depicting the data and information that is required beyond the literature review:..............23
Identifying the source that might be used for obtaining data or information:.....................23
Specifying the relevant statistical tests in details that will be conducted for the research:. 24
Stating limitations on reliability or representatives of the sources used for the research....25
Ethical consideration............................................................................................................25
References and bibliography....................................................................................................28

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ResearchBackground
Small-to-medium size enterprises (abbreviated as SME) are functioningin hugeburdenso as
toremain competitive in thecurrent economy worldwide. Also, there exists range ofstratagems
for small sized enterprises for attainingeffective ways of market reaction, costsavings, and
financial effectiveness. Also, these take incontractconcerning established approaches of
management regarding supply chain and enhanced accounting framework. In essence, the
significantpurpose of the current article is to represent the base and process behind ABC
costing and to find out the advantages of utilizing ABC over and above traditional systemof
withinsmall as well as medium sized enterprises (SMEs).
The environment of business, particularly forsmall and medium sized corporations
isalteringon a regular basis. Therefore, SMEs have the need to modernize and upgrade their
systems of accounting often so as toremain competitive and to augmentbusiness profitability
(Foroughi et al., 2017). As rightly indicated by AlKhajeh and Khalid (2018), activity-based
costing emphasizes actions that consume varied resources of particularly costs of driver and
SMEs (Ríos-Manríquez et al., 2014). Consequently, the small as well as medium sized
corporations moving forwardthe most from employment of ABC (activity based costing
technique) would be necessarily SMEs with a striking quantity of expensesimpacting to a
range of actions in giving commodities towards the consumers who has a changing demand.
Again, it can be hereby mentioned that in case if SMEs have very lessor no overhead
expenditure of production and produces products that are almost indistinguishable that
demands similar care for each product, the need for ABC can be changed (Hall & McPeak,
2011).. This present discussionchecks the various issuesconcerning both technical and
managerial in relation to themodel of activity-based costing (ABC).

COSTING MECHANISM
Small-Medium Enterprises’ Responsibilities and Activity Based Costing (ABC) or
Traditional Cost
Aims and objectives
 To critically examineoverall effectiveness of utilizing traditional cost accounting in
particularly SMEs
 To examine efficacy of using accounting based on activity within particularly SMEs
 To evaluate advantages of using accounting based on activity within particularly
SMEs
 To assess overall limitation of taking up activity-based accounting in essentially
SMEs
Research Questions
 What is the effectiveness of the TCA or traditionalsystem of cost accounting in the
context of the SMEs?
 What is the effectiveness of theABC activity based accounting in the context of
theSMEs?
 Which are the benefitsof implementation ofABC activity based accounting in the
context of the SMEs?
 Which are the disadvantages of implementation of ABC activity based accounting in
the context of the SMEs?
 Which are the advised strategies for reduction restrictionsof implementation of ABC
activity based accounting in the context of the SMEs?

Research Requirement Discussion

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Examination of effectiveness oftraditional cost accounting (TCA) for SMEs
As suggested by Namazi (2016), traditional costing system can be considered to be an
accounting mechanism that is utilized for prediction of profits. Essentially, this mechanism
utilizes cause and effect mechanisms and considers both direct/indirect costs along with
expends in a corporation.
Traditional cost accounting mechanism can be said to be effective for small as well as
medium enterprises (SMEs) as this method is quite simple. SMEs can enumerate this specific
rate by means of pooling different indirect costs and implementing the same equally in an
ascertained common unit (for ex, machine hours) (Foroughi et al., 2017). Thereafter,
management of firms enumerates the costs of each and every product/service utilizing
identical rate. Particularly, this can be considered to be comparatively less intricate than the
alternative mechanism of activity cost mechanism, that enumerates the cost of each and every
product/service founded on definite expends.
Cost Effective
As this method is considered to be less intricate than activity cost, accountants of corporation
do not face the need to spend time performing calculations for traditional cost mechanisms.
Therefore, traditional cost is considered to be less pricey than activity costing.
Internally Understood
There are different corporations that prefer traditional costing as they comprehend it properly
and trust company’s reliability. This remains effectual at the time when overhead is at a low
level to specific direct costs (Ahmad, 2017).
Easy to illustrate externally
Business concerns (small and medium sized ones) often utilize traditional costing
mechanisms in financial assertions as outsiders can evaluate overall value of
products/services in a simple manner.

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In addition to this, traditional cost can be said to be best utilized at the time when overhead of
a firm is relatively low in comparison to direct production costs (Yang & Chang, 2018). This
necessarily provides reasonably appropriate cost figures at the time when production volume
is huge and alterations in overhead costs do not generate a substantial variation when
enumerating production costs. Essentially, traditional costing mechanisms are inexpensive to
execute. Small as well as medium sized enterprises normally make use of traditional costing
for external report as it is quite simpler and at the same time simpler for outsiders to
comprehend. Nevertheless, it does not provide manager accurate image of costs of products
as the rates applicable of the overhead load is quite illogical and implemented equally to costs
of different products. In essence, overhead costs are necessarily not allocated to different
products that in actual fact consume different overhead actions (Ngubane et al., 2015).
Intrinsically, traditional mechanisms of costing is said to be best utilized for different
manufacturers that only produce different products.
Examination of effectiveness of activity cost accounting (ABC) for SMEs
Activity based costing can be said to be very accurate, however, it is said to be the most
intricate one to implement. Essentially, it is more suitable for business corporations having
higher overhead costs in place of companies that deliver services. SMEs can implement
activity based system of costing as this can help in the process of presentation of accurate
costs of products by means of concentrating on specific causes as well as effect associations
in cases of cost incurrence (Kalkhouran et al., 2017). This identifies that it is actions that
generate costs and not the products; thereby it is product that necessarily consume actions.
Benefits of using activity based costing in SMEs
Management of SMEs can implement activity based costing mechanisms as ABC detects the
actual nature and behavior of costs and aids in decreasing costs and recognizing actions that

COSTING MECHANISM
do not attach value to firms’ products. Thus, by means of implementation of ABC system of
costing, managers of corporations can control different several fixed costs of overhead by
exercising higher level of control over the actions that have generated said fixed overhead
costs (Potkany et al., 2016). Also, implementation of ABC can help in different actions that
are necessarily within as well as beyond the SME to track greater number of overheads to
company’s products. Implementation of ABC can also help in enhancing decision making
procedures since they can utilize more dependable data on product cost. Again,
implementation of ABC, by means of procedures of pooling of different activity costs and
recognition of drivers of cost can direct the way towards a wide range of applications.
Furthermore, small and medium sized business concerns operating in the service industry
have different features than manufacturing corporations. Service business concerns have
approximately no direct costs and majority of costs can be considered to be overheads and
they not necessarily hold stocks of essentially service since the service is essentially
consumed at the time when it is developed (Kustiningsih et al., 2017). Ahmad (2017)
suggests that ABC mechanisms can deliver superior quality of information on costing and aid
the management to carry out their task effectively and acquire better comprehension
regarding competitive advantage of firms along with strengths as well as weaknesses of small
sized enterprises. Often, managers have the requirement of a superior system of costing
namely ABC. Also, ABC system also has greater influence on corporations that have areas
with huge, escalating expends and have several products/services, number of customers,
procedures otherwise a combination of all the identified factors (Bruwer et al., 2017).
Essentially, business concerns that assume both small as well as large orders, present standard
and at the same time tailored deliveries can take into consideration implementation of ABC
based system of costing.

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Limitations of using activity based accounting (ABC) in SME
Armitageet al.(2016) asserts that ABC is the most effective when there exists numerous
overheads and different products. In any specific environment there exists numerous
overheads and ABC cannot be considered to be worthy and is not considered to deliver
insights Similarly, ABC is said to be irrelevant in any kind of business that markets a single
product or that delivers an individual service that is normally the case in small as well as
medium enterprises (Sunarni, 2015).
The primary limitations of activity based costing in SMEs are that this mechanism is quite
pricey to execute and at the same time maintain (Sung et al., 2018). Also, ABC systems of
costing generate reports that are necessarily different from profit/loss declarations generated
by means of traditional methods of costing (Dwivedi & Chakraborty, 2016). Since, majority
of corporations are utilizing traditional systems of costing, there remains variation on the
basis of costing as well as financial pronouncements of the two different firms operating in
identical industry and cannot be compared. Again, adaptability to different ABC systems
accounting is not appropriate for different types of corporations (particularly, small as well as
medium sized corporations) do not have several resources. There are numerous actions and
size of business transactions is observed to be extremely low.
In addition to this, data generated by means of ABC costing mechanisms can be
misinterpreted and this in turn can direct the way towards wrong business decisions (Rizwan
et al., 2018). Essentially, ABC systems of costing does not necessarily adhere to standard
regulations (say, GAAP) and business concerns face the need to present the reports (for both
internal as well as external requirements) by means of utilizing traditional together with ABC
systems both at once. Sunarni (2015) suggests that in case of ABC system of costing, costs
are necessarily allocated on the basis of drivers and actions are undertaken to produce the
product. Intrinsically, this delivers accurate and appropriatemechanisms of allocations of