Accounting for Managers: ABC Costing for Operational Efficiency

This report explores the application of Activity-Based Costing (ABC) for Harvey Norman, an ASX-listed entity, to enhance its operational efficiency. It details the features of the ABC model, emphasizing its ability to allocate overhead costs based on activities and cost drivers, unlike traditional methods. The report aligns the ABC model with Harvey Norman's mission and corporate strategies, recommending its implementation to address issues like long lead times and customer complaints by accurately identifying resource consumption. Additionally, the adoption of standard costing is suggested for variance analysis in direct costs. The report concludes that ABC costing can significantly improve cost management and decision-making, providing a more accurate understanding of overheads and enabling the identification of non-value-added activities. Desklib provides similar solved assignments.

Accounting for Managers
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Executive Summary
The present report has provided an insight into the usefulness of ABC costing method for
businesses to drive their operational efficiency. The use of ABC model can help the Harvey
Norman, an ASX listed entity to drive its operational efficiency by allocating the overhead cots
on the basis of activity and cost driver. In addition to this, the company is also recommended to
adopt the use of standard costing method for identifying the cause of variances in its direct cost
incurred in the manufacturing process.
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Contents
Introduction.................................................................................................................................................4
ABC Model & Its Features............................................................................................................................4
Meaning and purpose..............................................................................................................................4
Features of activity based costing...........................................................................................................5
Aligning of ABC Model with the Current Goals & Strategies of Harvey Norman.........................................6
Company’s Mission & Objectives.............................................................................................................6
Company’s Corporate Strategies.............................................................................................................6
Use of ABC Model in Achieving Company’s Strategies............................................................................7
Recommendations for the Implementation of ABC Model in Harvey Norman............................................8
Suggestion of Other Management Accounting Tool....................................................................................8
Conclusion...................................................................................................................................................9
References.................................................................................................................................................10
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Introduction
Activity based costing has got attention during the last few decades as traditional costing
method does not provide efficient cost allocation of overhead costs. Activity based costing
allocates overhead costs on the basis of the resource utilization by each activity. On the other
hand traditional costing method allocate costs simply taking machine hours as cost base that give
rise to certain issues in calculating exact cost consumed by each product.
In this report, activity base costing model and its features are discussed in detail to
provide how ABC costing works and helps the cost manager in allocating overhead cost in most
appropriate manner. The application of ABC model in Harvey Norman has also been explained
in detail and also one other costing model has been provided other than ABC model that can be
applied in Harvey Norman.
ABC Model & Its Features
Meaning and purpose
Activity based costing (ABC) is a costing methodology used by business organizations for
identifying the costs incurred in production of their products and services as per the actual
resources consumed by them. This is done by identifying the number of activities involved in
manufacturing of a product or delivering a service and then allocating the costs of each activity
as per the resources consumed. The model assigns the indirect costs incurred in manufacturing of
products or services into direct costs and helps in realization of actual accounting data to track
the costs of final outputs produced by a firm. Thus, the model of ABC adopts the use of
assigning the resources to the activities and activities to the cost objects on the basis of
consumption of resources. The cost objects helps in determining the final costs involved in
manufacturing process of a firm by adopting the use of cost drivers that are the factors impacting
the cost of each activity (Christiansen and Bryan, 2014).
Management accountants are increasingly adopting the use of ABC costing method for
gathering real accounting data and thus taking important decisions for maximizing the
operational efficiency. Activity base costing (ABC) allocate all the indirect cost to the main
product cost in more logical manner as compared to traditional approach. Traditional costing
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method allocates all the indirect costs simply on the basis of either machine hours or labour
hours. It gives rise to most significant issue of not allocating the indirect cost on the basis of
resource utilization. In relation to this activity based costing assign all the indirect costs to the
activities and through use of cost pool it has been allocated to the product with the help to actual
utilization of resources by each product in each activity. So it can be said that through use of
activity based costing one can allocate the cost to product on resource utilization basis while
traditional costing uses illogical method which is based on assumption that all cost are used in
proportion to labor hours or machine hours (Hansen and Guan, 2007).
In the recent decades, the activity based costing has received a great importance as
manufacturing overhead costs have increased in great quantity and it has been that there has been
no correlation of overhead cost with the productive machine hours or direct labour hours. With
the diversity of products and services the demand and supply of each product varies that means
some product are manufactured in large quantity while some are manufactured in small quantity.
It means there is high requirement of cost model that understand the cost structure and helps to
allocate indirect cost as per use of resources by each product.
Activity based costing provides most appropriate and accurate method of costing to
calculate the cost of product and services. It helps cost manager in pricing decision making
through providing more accurate pricing of products. The use activity based costing helps in
better understanding of overheads and cost drivers and also allow to make visible the non value
added activities in more precise manner. So through use of ABC costing cost managers work on
non value added activities to reduce the overhead costs (Hoque, 2005).
Features of activity based costing
 Activity based costing helps in providing insight view of cost overhead that is not easily
visible and also grows very rapidly leading to increase in overall product cost.
 ABC model helps in monitoring the total life cycle cost and performance of products that
helps in improving the profitability of the company.
 It improves the budgeting effectiveness through identifying relationship between the cost
and performance between the different service levels.
 ABC is best cost model as it encourages continuous improvement and total quality
control as planning and control are directly linked to the process level.
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 The most important characteristics of the ABC costing model is that it links corporate
strategy with the operational decision making process.
 ABC costing model lead to elimination of waste through providing greater visibility of
non value added activities
 It provides help in make or buying decisions which was not possible in traditional costing
method because traditional costing method lead to wrong decisions (Using Activity-
Based Costing (ABC) to Increase Profitability, 2018).
Aligning of ABC Model with the Current Goals & Strategies of Harvey
Norman
Company’s Mission & Objectives
Harvey Norman is recognized as an Australian based company that is involved in
retailing of furniture, bedding, computers, communications and consumer electrical products. It
provides its products and services both domestically and at an international level. It carries out
its operations as a franchise at an international level with the main brand in Australia owing all
the stores in foreign locations. The mission of the company is to deliver diverse product range to
its customers in the categories of furniture, electrical goods, bedding, home appliances, bathroom
items and computerized communications. The company aims to attain its mission by
incorporating the use of high technology methods for manufacturing of its key products for
gaining market leadership. The strategic mission of the company to attain market leadership is
determined to be achieved by it with the use of its franchise model enabling it to expand its
business operations. The company at present is known to have about 280 company owned and
franchised stores across Australia, New Zealand, Europe, South-east Asia and many other
foreign locations (Harvey Norman, 2018).
Company’s Corporate Strategies
The company strategy is to develop positive engagement with its local communities
through establishing the franchise system. The company grants franchisees to independent
proprietors who sell its products under the major retailing categories. The proprietors lives in
close association with the franchised unit and tend to develop positive relations with local
communities. This helps the company in gaining an insight into the customer needs and
expectations adequately and fulfilling them appropriately. The product unit is delivered to the
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customer from its franchised complex with the help of local transport company. Thus, the
franchise model of the company is the main strategic driver responsible for carrying out its
business operations at a global level adequately and maintaining positive relations with
customers (Harvey Norman, 2018).
Use of ABC Model in Achieving Company’s Strategies
Activity based costing method is proving to be largely useful for the retailers to identify
their overhead costs and convert them into direct costs. This helps in identification of the actual
cost incurred in the manufacturing process of a company and thus assisting the management
accountants in taking strategic decisions. The strategic decisions regarding the future growth and
development can be taken by the management accountant of the company with the use of
quantitative measurement of costs obtained. Harvey Norman is involved in manufacturing of its
diverse product categories that involves consumption of varying resources. As such, it is
essential for the business manager to identify the actual cost involved in its production process to
take essential steps for improving its operational efficiency and thereby driving its profitability
position (Varteiu and Bota, 2012). The actual resources consumed in production of a business
unit by the company can be assessed accurately with the use of ABC costing method. This is
made possible by the use of ABC costing method through identification of activities involved in
manufacturing of a product. This is followed by assessing the resources that are consumed by
each activity and determining the cost divers for each activity. The unit costs involved for each
driver are then calculated that helps in allocation of the financial costs for each cost object, i.e., a
product manufactured (Using Activity-Based Costing (ABC) to Increase Profitability, 2018).
The use of ABC costing method can help in resolving significant issues faced by the
company during designing of its various product categories. This includes long lead times,
quality problems and customer complaints. These problems can be resolved by the management
accountant in collection of realistic accounting data for analyzing the resources consumed during
its production process and taking strategic decisions for redesigning of its products. The most
significant aspect in this context is to identify the raw material consumed by a product or a
manufacturing process. The raw materials cost that is difficult to be quantified includes overhead
or indirect materials costs such as glue or paint required for the production of a furniture items
(Quesada-Pineda, 2018). Therefore, ABC costing method is recommended to be used by the
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company for gaining a cost estimation of the costs that fluctuates as per the volume of products
manufactured. ABC costing method categories the activities involved in the production process
as value-added or non-value added and thus assists the managers in eliminating all the activities
that can be considered as wasteful. Therefore, it help in gaining information about the variable
costs incurred in the overall production process by only determining the cost of the activities that
are value-added. Also, the business manager acquires information about the unnecessary
activities that should be eliminated and thus improving the operational efficiency (Andersch and
Lawser, 2013).
Recommendations for the Implementation of ABC Model in Harvey
Norman
The company is recommended to adopt the use of following steps for the implementation
of ABC costing method:
 The first step is to identify the products requiring the production of the overhead costs
involved in their production. In this context, Harvey Norman is involved in
manufacturing of diverse products and therefore recommended to implement the method
primarily for one product to examine the benefits of the method.
 This is followed by identification of the direct costs, indirect cost and the activities
involved in manufacturing of a product. This involved collection of cost information
from the suppliers or hiring business consultants to record such data. This is then
followed by the integration of AC costing method to convert indirect cost to direct cost
and gaining actual cost based on the resources consumption for manufacturing a
particular product unit (Palmer and Wiedenbeck, 2013).
Suggestion of Other Management Accounting Tool
The company is recommended to adopt the use of standard costing method that helps in
identifying the variances between the expected and actual costs. The method of standard costing
involves the use of determining target costs on the basis of direct material or labor to be utilized
in the manufacturing process of a company. The collection of real direct cost incurred helps in
identifying the variances by the management accountants and implementing necessary strategies
for overcoming them. Thus, the use of standard costing in addition with ABC costing method
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will help the company to gain an accurate collection of direct and indirect costs involved in its
manufacturing process (Berger, 2011).
Conclusion
The report has concluded that ABC costing method is highly efficient to be used by the
business companies to success in the present competitive business world. This is because it
provides a collection of realistic accounting data hat assists the management accountants to
identify the wasteful activities that should be eliminated and thus driving the operational
efficiency of the manufacturing process. Harvey Norman, involved in manufacturing of diverse
product items should adopt the use of ABC costing model to realize its corporate strategy of
business expansion. This is because it will drive the company profitability and thus supporting its
corporate strategy of driving business expansion at an international level.
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References
Andersch, A and Lawser, S. 2013. Status and Opportunities Associated with Product Costing
Strategies in Wood Component Manufacturing. Forest Science 59(6).
Berger, A. 2011. Standard Costing, Variance Analysis and Decision-Making. GRIN Verlag.
Christiansen and Bryan. 2014. Handbook of Research on Global Business Opportunities. IGI
Global.
Hansen, D. and Guan, L. 2007. Cost Management: Accounting and Control. Cengage Learning.
Harvey Norman. 2018. Company overview. [Online]. Available at:
http://www.harveynormanholdings.com.au/company/ [Accessed on: 28 May 2018].
Hoque, Z. 2005. Handbook of Cost and Management Accounting. Spiramus Press Ltd.
Palmer, J. and Wiedenbeck, J. 2013. Product Costing Program for Wood Component
Manufacturers. Forest products journal 63(7/8), pp. 247-256.
Quesada-Pineda, H. 2018. The ABCs of Cost Allocation in the Wood Products Industry:
Applications in the Furniture Industry. Publications and Educational Resources.
Using Activity-Based Costing (ABC) to Increase Profitability. 2018. [Online]. Available at:
https://onlinemasters.ohio.edu/using-activity-based-costing-abc-to-increase-profitability/
[Accessed on: 28 May 2018].
Varteiu, D and Bota, C. 2012. Application of the Activity Based Costing System to the Wood
Industry. [Online]. Available at:
http://stec.univ-ovidius.ro/html/anale/RO/2016/2016-I-full/Section-V/34.varteiu_daniel.pdf
[Accessed on: 28 May 2018].
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