University ABC Costing Analysis: Journal Review and Discussion

This report provides an in-depth analysis of Activity-Based Costing (ABC), exploring its advantages and disadvantages, and its application in managerial accounting. The report begins with an executive summary, followed by an introduction to ABC, detailing its core principles and how it allocates costs. It then outlines the advantages, such as accurate product costing, and disadvantages, like the time-consuming nature of implementation. The report analyzes two research-based journal articles focusing on the measurement and management of unused capacity in a Time-Driven Activity-Based Costing (TDABC) system and the value of ABC in competitive pricing decisions, particularly in the manufacturing industry. The discussion includes the studies' aims, research questions, similarities and differences between findings, and specific outcomes. The report concludes by highlighting the significance of ABC in effective cost reduction and competitive pricing, emphasizing its usefulness in a business environment. The analysis also touches upon the practical implementation of TDABC, including the calculation of resource costs and the optimization of resource allocation.

Managerial
Accounting
Assignment

1
By student name
Professor
University
Date: 5th Sep 2018.
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Executive Summary
Here in the given report we are discussed on the topic of activity-based costing (ABC) and
analyzed the same. To review the use and importance of activity-based costing in the business
world and small and medium-sized organization we have been selected two research-based
journal articles. With the help of this report, it is also inferred what are the advantages of the
activity-based costing system and what is the limitation of this costing system and what are the
steps should be taken to resolve that limitation. The report also draws attention to the area where
this system plays a significant role in effective cost reduction and help in competitive pricing
decision especially in the manufacturing industry. From the in-depth study of the activity-based
costing system and after considering the advantage and limitation of this system it has been
concluded that how this concept of ABC can be useful in a business environment.
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Contents
Executive Summary.....................................................................................................................................2
Introduction.................................................................................................................................................4
Advantages of ABC costing technique.........................................................................................................4
Disadvantages of ABC costing technique.....................................................................................................5
Discussion on the two journals....................................................................................................................6
Explanation of the Selected Management Accounting Topic......................................................................6
Purpose of the studies and the research questions set out to be explored............................................6
Similarities and differences between the findings of the 2 studies.............................................................8
Specific outcomes and relevant learnings from the research findings..................................................10
References.................................................................................................................................................12
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Introduction
Activity-based costing is a costing strategy used by business houses or industries to assign
indirect costs to their products; or disburse their income or expenses to different business
operations. The activities are often under the head direct costs; however, the allocations are made
as a ration of the sales of the total sales. In this system of costing the total pool of cost are being
allocated to different activities and then those activities are being allocated to the respective cost
center as per their nature (Chron, 2017). Then those costs are distributed based on the cost
drivers. In this case, the cost driver is the percentage of the activity or allocation base which
determines the total activity cost to be altered. There is a simultaneous relationship between the
cost driver and total cost that is more of units of a cost driver, more will be the total costs. For
instance, the cost driver for electricity expenses is the hours a machine operates during
production. Following this costing principle, all of the costs can be divided into 3 groups;
including semi-variable, variable and fixed. These costs may be allocated based on space used
for storage cost. The total volume of material to allocate freight cost, machine hours, labor hours
and effort required in the sale of the final product etc. According to Dan (1995) the approach is
popular because it uses few resources in an effective and efficient way.
Merits of the ABC costing strategy
Advantages of the activity-based costing are given below:
1. It helps in determining the effective cost of manufacturing of given products. This is very
critical for the pricing process as otherwise wrong costing will be done and some of the
materials may end up in profits and some in losses thereby having no product wise
profitability (Dichev, 2017).
2. It assisting in calculating the cost properly and accurately the cost of product and help in
providing proper allocation amongst different products. This is again important as ABC
costing as well as Time Driven Activity-based costing gives a way out for allocation. It
generally gives a standard key which can be used for allocation purposes.
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3. It also highlights what are inefficient segments and helps in reducing the wastage of
money. The inefficient processes, as well as products and segments, can be eliminated
from the company as there are many alternatives one of which is the outsourcing of the
processes.
4. It also provides a more absolute way to calculate profit margin so that the manufacturing
overhead can be reduced to a relatively low level (Alexander, 2016).
Demerits of the ABC costing approach
Apart from all these advantages the approach also endures from many limitations as well. Which
are given below:
1. It is a time-consuming process which takes lots of time which require the lot of effort to
collect and analyze the data (Belton, 2017).
2. It may not be the healthy approach for a small company as it is an expensive process.
This is because the use of time driven activity-based costing, as well as the traditional
activity-based costing, can only be realized when the base is higher and the company is
big selling a number of products.
3. As the ABC costing technique is not following generally accepted accounting principles
because of that, ABC report is used for external reporting purposes. There is a separate
costing report which needs to be prepared for reporting purposes thus adding to the total
efforts (Fay & Negangard, 2017).
4. The result taken from the ABC technique may vary from that obtained from traditional
costing methods – this creates conflict.
5. For the proper utilization of ABC costing technique in-depth knowledge of the
organization, its operation and nature are required. Additionally, the allocation; costing;
cost drivers; cause and effect relationship; and allocation are required.
Evaluation of the Journal Articles
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In this section we analyzed two journals, including "The Measurement and Management of
Unused Capacity in a Time Driven Activity Based Costing System” by Veyis Naci Tanis and
Hasan Özyapici; and “The Value of Activity-Based Costing in Competitive Pricing Decisions”
by Warlop Luk, Eddy Cardinals; and Filip Roodhooft (Eddy, Filip, R, & Warlop, 2004).
Discussion of the Selected Topic
From the first journal, we analyzed the features of the activity-based costing (ABC) which allow
effective determination of prices, especially in the manufacturing industry. From the in-depth
study of this system one thing clear that the ABC costing system is more beneficial than volume-
based costing for cost allocation process. According to Gooley (2016), the ABC approach allows
companies to reject irrelevant competitor feedback: this promotes efficient decision-making.
Aims of the Study and Research Questions
The purpose of study this system of costing is to evaluate the importance of this approach in
decision making when complete information considering all the factors are not available with the
accountant for effective price calculation. In recent days it is very difficult to fix price based on
existing market condition. In such a situation market plays a negligible role as the price of the
product completely depend upon market feedback which generally supersedes the accounting
information. Raiborn, Butler, and Martin (2016) explain that based on the multimarket price
fixation technique, the traditional costing methods provide mispriced cost estimates; the prices
are either overallocated or under allocated or suffer a high loss in a certain market segment. In
some cases, the market affected by biased costing method provides a cost data which shows good
pricing (Briers et al. 1999). However later on with the help of two hypotheses, the test was
conducted to evaluate the result in real terms. Now, the significant question is what were the two
hypotheses? The 1st theory explained that profits and prices are optimal when the company
receives positive reviews from the customers. The second hypothesis suggests that the market
feedback is more informative when the ABC technique fails, due to the biased cost data. To
determine the effect clearly, an experiment was conducted. The study involved two groups
consisting of 131 cost accounting and management accounting students. The participants were
given price information and requested to determine the cost using the two costing technique: the
traditional costing method and the ABC costing approach (Bromwich & Scapens, 2016). For the
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ABC system, the cost allocated depends on three activities, including delivering, ordering and
software handling. However, the cost of activity depends on the ABC approach in two market
segments and their cost-driver. Examples include the deliveries, software handling and the
number of orders (Goldmann, 2016). Then the result of these was examined to see the impact on
the profit over ten different periods and judge the stability of the process. The method was taking
an average of the 1st five results to review the interaction between the market feedback and the
accounting report which were found less relevant on examination of data. The study indicates
that the second hypothesis is wrong. Therefore, the competitors either operate in places where
information is not detailed; or in competitive markets. Notably, if the firm accurately allocates
cost activities, after considering the suitable host driver, then it provides the most relevant cost
for the product. In this way, the company makes the product more competitive; and creates an
efficient cost fixation process.
The primary question that this article answer is how to estimate the unutilized capacity in a firm
using the biased costing system for the second case study. In some cases where the companies
working and functioning whole day whole night then it might be difficult to determine what is
the unused capacities. Choy (2018) argues that companies must evaluate two compulsory and
real unused capacities. The main goal of this study is to enhance the effectiveness of the TDABC
and ABC technique by the describing the unused capacities per shift. The ultimate goal here was
to redistribute employees to other more productive areas depending on the per shift, rather than
the unused capacity. However, it is not possible through the traditional method of costing
because one a days it becomes less effective and overall basis on which it works as become
useless. In the today's competitive environment the companies were looking for more advanced
and cost-efficient method of costing that can help them in cost management. However, one of the
major constraints of ABC costing system selection of the cost drivers for the allocation of the
costing element under different cost segments and optimum utilization of resources of the
company is had underlined with the help of this case study.
The contemporary tool of the ABC approach is time driven and must be deployed to improve the
company’s competitive advantage. Under this system of costing the first thing manager need to
understand the what is the resource and what is the optimum quantity of resources required to
complete the activity effectively and efficiently (Visinescu, Jones, & Sidorova, 2017).
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Implementation of the TDABC involves two aspects; one is the cost per unit of resources, and
the other is the number of products used by the services, activities, and clients. The main focus to
this system of costing is eliminated all the limitation imposed by the activity-based costing and
improve the productivity of goods and try to incorporate all those features which get ignored
under the ABC system. In general terms, it helps in calculating the time and resource required to
complete the activity. In this system, the cost is calculated on the basis of practical capacity in
place of the cost per unit (Naci & Hasan, 2012). Like a machine actually works for 50 hours a
week as per details but if we calculate effective hours we can consider almost 80-85% of total
hours which accounting to approx. 40 hours per week. The major area of focus is here is that to
take into account the practical and effective capacity otherwise the cost allocation, as well as the
full results, would not be accurate. However, the other criteria are the calculation of a number of
unit of the resource being used and to calculate the number of the units the manager can use
these tactics like interview their employee or do estimates through direct observation procedures.
Some entities follow this principle with their employee it might be not the exact result but
provide a rough estimate.
Similarities and Differences
There are a few similarities between the 2 studies which are enlisted below:
1. Both the costing method has been initiated for the better management of time and cost
and to reduce the overall cost to make the product more competitive at the workplace.
This is also initiated to help the accountants with better cost allocation methods and
thereby making it easier for costing and pricing of the products (Grenier, 2017).
2. The aim of creating the two costing techniques is to make pricing easier; and to mitigate
the failures of the traditional costing method. It also aims to overcome the initial
inefficiencies and highlight the areas which need to be eliminated. This not only helped a
number of companies in cutting down on costs but also on the man-hours.
There are several differences between the two case studies, including:
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1. In the first technique, the focus has been on the cost driver however in case of second
technique emphasis shifted to time management. The shortcoming which was posted in
the activity based system was overcome by time-driven activity-based costing which only
focused on 2 aspects namely the number of time units required to complete the procedure
and what is the cost of individual time units, thus harmonizing and simplifying the
process (Knechel & Salterio, 2016).
2. Activity-based costing was focused on to eliminate all those all those factors that are the
reason of poor management of time and resources and allocate the cost under accurate
cost driver so that we can find out the optimum cost. And in the case of Time-based
costing the real focus is on reducing the time taken that was taken to calculate the cost or
selection of appropriate cost deliver, and make the process more easy and understandable.
In recent days more of the companies preferred TDABC system over the ABC system
(Linden & Freeman, 2017). However, both systems of costing have their own merits and
limitation which is discussed to reach a conclusion.
However, there are many another issue where improvement is required to get the better
results like time management which is resolved with the help of TDABC system and in case
of issue related to the selection of cost driver the issue is resolved with the help of activity-
based costing. Hence from the above discussion, it is clear that both the system are more
improved than the traditional method of costing.
Specific Results and Relevant Concepts
From the in-depth study and deep analysis of theses research paper one thing clear that both the
approach are highly useful and will be useful for accurate management of cost and time. In other
words, it helps in cost reduction and increases the profitability. Some of the primary findings
from the first case study include:
1. The company’s price-demand effect highly affects the market; compared to the
competitors cross pricing. In case other competitor charges the lower price of the product
small competitor will be left the meet with lower demand (Heminway, 2017).
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2. Here the industry which follows this approach in case any new entrants want to enter in
the specific market segment then the new player must follow the rules and principle set
by existing market player.
3. The cases where the traditional method of costing is used for price fixation are generally
not used as this approach provide a wrong allocation of cost and give an inappropriate
result which reflects less accounting profit than actual. It also affected the sales if the
competitive price of the same product is lower in the market. However, when the
industries start following the ABC system the cost determined by the company is
optimum as the method applied for cost allocation were reasonable and reliable. Hence
the sales of the product increase (Trieu, 2017).
4. From the study of this approach, it is also observed that the negative feedback regarding
these approaches less impacted to the companies who were using ABC technique rather
than the companies who were followed by volume based costing techniques.
Key findings from the second case study are enlisted below:
1. One of the major issues that are resolved by the TDABC system is selecting of the cost
drivers. In this system of costing focus was to use the practical capacity of the machine as
it also provides the same result that what would be the expected output.
2. This approach also helps in cost reduction because of which the product would become
more attractive and cheaper at the workplace and capture a significant area of the market.
It also helps the companies to plan better for the future. This was not possible either in
traditional costing system or in the activity based system.
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References
Alexander, F. (2016). A Changing Face in Accountability. The Journal of Higher Education, 71(4), 411-431.
Belton, P. (2017). Competitive Strategy: Creating and Retaining Superior Performance. London: Macat
International Ltd.
Bromwich, M., & Scapens, R. (2016). Management Accounting Research. Management Accounting
Research, 31, 1-9.
Choy, Y. K. (2018). Cost-benefit Analysis, Values, Wellbeing and Ethics. Ecological Economics, 145.
Accessed from https://doi.org/10.1016/j.ecolecon.2017.08.005
Chron. P. (2017). Five features in internal business control system. Accessed from
http://smallbusiness.chron.com/five-common-features-internal-control-system-business-
430.html [19 September 2017]
Dan, S. (1995). Benefits of activity-based cost management. Journal of Management Accounting
Research, 7, 167.
Dichev, I. (2017). Conceptual Foundations of Financial Reporting. Accounting and Business Research,
47(6), 617-632. doi:https://doi.org/10.1080/00014788.2017.1299620
Eddy, C., Filip, R, & Warlop, L. (2004). Value of Activity-Based Costing for Competitive Pricing.
Management Accounting Research, 16, 133-148.
Fay, R., & Negangard, E. (2017).Data analytics and the Risk of Fraud. Accounting Education, 38, 37-49.
Goldmann, K. (2016). Financial Liquidity and Profitability Management in Practice. Financial
Environment and Business Development, 4, 103-112.
Gooley, J. (2016). Principles of Australian Contract Law. Australia: Lexis Nexis.
Grenier, J. (2017). Encouraging Professional Skepticism in the Industry Specialization Era. Journal of
Business Ethics, 142(2), 241-256.
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