Managerial Accounting HA2011: Activity Based Budgeting for DHL India

This report evaluates the feasibility of implementing activity based budgeting (ABB) at DHL Express (India) Private Limited. It begins with an overview of DHL Express (India), highlighting its operations and strategic transition. The report then describes ABB, detailing its features and contrasting it with traditional budgeting systems, emphasizing the importance of identifying cost drivers and aligning activities with organizational strategies. It discusses the suitability of ABB for DHL, considering the company's focus on cost management and competitive market environment. The report concludes by summarizing the potential benefits and challenges of adopting ABB within DHL Express (India).

Accounting
Assignment

1
By student name
Professor
University
Date: 23rd Sep 2018.
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Executive Summary
We have prepared this assignment on the activity based budgeting and have considered the
feasibility report of DHL Express (India) Private Limited. All the discussions have been done on
the advantages and drawbacks of ABB and the reason for its adoption has also been discussed
below. The assignment highlights the different ways in which ABC costing can be put to use by
the company
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Contents
Introduction.................................................................................................................................................4
Key Points....................................................................................................................................................4
a). A brief description of the Client Company..............................................................................................5
b). Description of ABB and its features........................................................................................................6
Features of Activity Based Budgeting........................................................................................................10
c). Difference between ABB and Traditional Budgeting system.................................................................11
Difference between traditional budget and Activity based budgeting......................................................18
d). Discussion on the Suitability of ABB.....................................................................................................21
Conclusion.................................................................................................................................................21
References.................................................................................................................................................22
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Introduction
After viewing the current market trends and increasing competition in the industry, DHL Express
(India) Private Limited has become keen on introducing better reforms in the organization for
proper administration and cost management. The chief executive officer of the company has
stressed on replacing the current budgeting practices with a better and sound budgeting practice.
For this the chief executive officer of the company has been attending various seminars in this
regard and has recently come across activity based budgeting model (Andiola, et al., 2018). He is
considering the introduction of the activity based budgeting into the organization. But before the
adoption of this system of budgeting he wants analyze the system more deeply. The chief
executive officer of DHL Express (India) Private Limited approached ABC Management
Consultants for a proper evaluation of the system of activity based budgeting. The chief
executive officer need ABC Management Consultants to provide the CEO with a feasibility
report in this regard to analyze the viability of adopting activity based budgeting, the current
circumstances of the company (Bumgarner & Vasarhelyi, 2018).
Key Points
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a). A brief description of the Client Company
DHL Express (India) Private Limited is a wing of a German logistics company, being Deutsche
Post DHL, in India. It is one of the most renowned transportation and logistics company
involved in the courier services and logistics services to all types of customers being residential,
industrial, commercial and business customers. The various activities which are involved in the
business of DHL Express (India) Private Limited include repair and return, direct express
inventory and strategic inventory management. It is also engaged in the business of
transportation and has a fleet of vehicles (Charles H, et al., 2015). Apart from the above
mentioned activities the other value added activities in this business are services planning,
vehicles set up, customers order processing, manual loading, mechanical loading, fuel supply,
road journey, manual unloading, mechanical unloading, maintenance, technical support, etc, all
these activities have related activity drivers or cost drivers such as number of vehicles, site
orders, issuing fuel orders, number of liters, team working hours, loaded tons, distance
kilometers, unloaded tons, maintenance shop hours, etc. There were several non value added
activities as well like unnecessary transportation, waiting, non value added processing, excess
inventory, defects, unnecessary motion, etc. the company has spent a lot of amount on the
operational activities due to which the profit of the company in past few years were below
expectation. These costs were incurred in order to increase the quality of service provided by the
company to its customers. This has resulted in lower profits for the company.
There is cut throat competition in the market, which is ever increasing. Same has been the case in
the transportation and logistics sector (Garon, 2018). To face the competition the company has
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been transitioning from the older strategy to the newer strategy, that is, from strategy 2015 to
strategy 2020.
b). Description of ABB and its features
There are various types of budgeting of which, one is Activity based budgeting. The activity
based budgeting is a system of budgeting which involves researching, recording and analyzing
the various activities of an organization which leads to costs for a business. Activity based
budgeting is different from traditional budgeting in a way that it involves identification of
different cost drivers or cost activities. Which goes to say that it is closely related to activity
based costing (Kangarluie & Aalizadeh, 2017).
The concept of activity based budgeting is very much like that of the activity based budgeting. In
order to understand this system of budgeting we have taken an example, which is presented
below:
Activity-based budget:
Research:
Salaries $ 24000
Internet connection 1,860 $ 25,860
Shipping:
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Salaries $ 26,800
Telephone 2,300
Ship sleepeze 634,000
Ship plushette 550,000
Ship ultima 274,000 1,487,100
Jobbers:
Salaries $ 15,900
Telephone 1,680
Commissions 280,000 297,580
Basic ads:
Salaries $ 12,000
Advertising 17,000 29,000
Digital ads:
Salaries $ 10,890
Advertising 680,000 690,890
Office management:
Salaries $ 15,000
Depreciation 10,000
Supplies and Internet 11,500 36,000
Total $2,566,430
2. The data given above provides the activity based budget, which shows the various activities
and its related costs. It is clear from the budget that which activity is consuming what
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portion of the company’s money. For example, we can say from looking at the budget that
the most cost intensive activity is advertising, where the highest amount of cost is involved
and jobbers is second costly activity in the budget. With the help of this budget, the
management of the organization can take measures to reduce the cost related to advertising
and jobbers. However, reducing the cost of advertising becomes quite problematic in case of
first year of operation of the company. Hence the management is required to look into this
matter with other possible measures (Mock, et al., 2018).
While the development of the activity based budgeting, there are several things that is needed to
be identified. Some such things have been mentioned below:
i) The association of the activity level volume driver with the source of an activity level
volume driver within the organization.
ii) Ways in which the main source of the activity level volume driver can affect the
requirements of resources in respect of an activity and how it can be changed.
iii) The activities being performed by the organization should be performed with efficacy
and should meet the levels of standard as laid down for this purpose (Lessambo,
2018).
While executing the process of activity based budgeting there are various other things which
requires attention. Some of these activities includes recognition of the resources which are used
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in the production process along with the recognition of outputs that are being produced by the
organization. Just like activity based costing, the activity based budgeting is about allocation of
the costs to the respective activity on the basis of activity driver in respect of every products and
services. Such allocations are based on the characteristics of those products and services in
relation which they are being allocated.
We have already mentioned above the connection of the activity based budgeting with the
activity based costing. This connection is very important for the implementation of the aqctivity
based budgeting in an organization, since the implementation of the activity based budgeting
requires the organization to follow activity based costing as the system of cost account of the
organization or else the activity based budgeting will not work (Mock, et al., 2018).
There are several fundamental principles in relation to the activity based budgeting which the
organization is required to take under consideration. These fundamental principles are as
follows:
i) Proper and sufficient connection should be formed between the organization’s
activities and its strategies.
ii) Gap analysis should be conducted in order to form the connection between the
activities and organizational strategy.
iii) It is necessary to ascertain the management of the capacity and a sound prediction of
the company’s revenue.
iv) There must exist, a proper connection between the business of the organization and its
business processes.
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The activity based budgeting is considered to be more effective in case of those organization
where the indirect costs consumes considerable portion of the total operational costs. As we
know that activity based budgeting involves allocation of costs based on cost drivers to their
respective activities, it is very famous in such kind of organizations where indirect cost is too
high and the organization is engaged in performing various kinds of activities (Mubako &
O'Donnell, 2018).
Features of Activity Based Budgeting
The key features of Activity Based Budgeting are being mentioned below:
i) Activity based budgeting is being considered as a participative process in order to
control and sustain continuous improvement (Eddy, et al., 2004)
ii) Activity based budgeting integrates the activity planning with accounting to provide
effective control within the organization
iii) Activity based budgeting enables the establishment of performance targets in the
organization for the purpose of control
iv) Activity based budgeting enables the management in the identification of various
opportunities for the improvement of the entity’s costs
v) Activity based budgeting assists in analyzing the various discretionary spending
options and prepares a priority ranking
vi) It is being considered as a process which links the organization’s strategic goals and
objectives to the planning process
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vii) Activity based budgeting uses those activity analysis techniques which are well
proven, which is the source of all activity based system
viii) Activity based budgeting involves lots of complexity as it requires a thorough
research and assessment on the different activities and resources which are crucial for
the entity
ix) The orientation of the activity based budgeting is toward short term goals and
objectives of the organization instead of long term goals (Abdullah & Said, 2017)
x) This has been considered the best method of budgeting since it helps in the
identification of the value added and non value added activities in the organization
xi) Activity based budgeting is a process of planning which is connected to the strategic
objectives of the organization
c). Difference between ABB and Traditional Budgeting system
Traditional system of Budgeting
Traditional budgeting is method of budgeting which has become quite outdated in today’s
time. It is process of preparation of budget by taking the budget of the previous year as base.
The projection of the business revenue and business expenses of the current year is done on
the basis of those of last year. It is an accounting tool which helps in the prediction and
analysis of the earnings of the business along with its expenses. The budget of the last year is
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