Activity Based Costing Implementation: HI5017 Managerial Accounting

This report provides a comprehensive analysis of activity based costing (ABC) in managerial accounting. It discusses the use of ABC costing, its benefits in improving performance, and its disadvantages. The report includes a review of two journal articles focusing on the implementation of ABC costing and its success in Australia, highlighting similarities and differences between the studies and learning outcomes for management accountants. It explores the concept of adopting activity based costing, emphasizing the importance of identifying cost drivers and managing costs effectively. The report also examines the key steps for implementing the ABC costing model and factors to consider when adopting it, such as cost-benefit analysis and setting cost drivers. The report concludes by summarizing the benefits and challenges of using ABC costing in organizations.

Microsoft
ACTIVITY BASED COSTING
ABC Costing model
ABC
Managerial Accounting

EXECUTIVE SUMMARY
The business environment is changing so fast and the working structure of it is very
complex so it became very important for the business industry to grab the activity based
costing for their business to work and for cost maintaining process of the organization. This
method of costing is been followed with the aim to divide the costing of the organization in
the two different path. All the benefits, advantage and the disadvantage the organization can
get from the activity base costing is been discuss in this report.
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Table of Contents
EXECUTIVE SUMMARY...................................................................................................................1
INTRODUCTION.................................................................................................................................3
Use of ACTIVITY BASED COSTING.............................................................................................3
The concept for adopting the activity based costing..........................................................................3
BENEFITS IN IMPROVISING THE PERFORMANCE..................................................................4
SOME INSEPARABLE DISADVANTAGES..................................................................................5
STUDY 1: JOURNAL OF MANAGEMENT ACCOUNTING RESEARCH.......................................5
The implementation of the activity based costing..............................................................................5
PURPOSE.....................................................................................................................................5
RESEARCH QUESTION..............................................................................................................6
STUDY 2: JOURNAL OF APPLIED MANAGEMENT ACCOUNTING RESEARCH......................6
IS ACTIVITY BASED COSTING MODEL A SUCCESS IN AUSTRALIA...................................6
PURPOSE.....................................................................................................................................6
RESEARCH QUESTION..............................................................................................................7
SIMILARITIES AND DIFFERENCES BETWEEN THE TWO STUDIES.........................................7
SIMILARITIES.................................................................................................................................7
DIFFERENCES.................................................................................................................................8
LEARNING OUTCOMES FOR THE MANAGEMENT ACCOUNTANTS FROM THE TWO
STUDIES..............................................................................................................................................9
STUDY 1: JOURNAL OF MANAGEMENT ACCOUNTING RESEARCH...................................9
STUDY 2: JOURNAL OF APPLIED MANAGEMENT ACCOUNTING RESEARCH..................9
CONCLUSION...................................................................................................................................10
REFERNCES......................................................................................................................................11
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INTRODUCTION
In this given report, discussion would be made about the different method for the
activity based costing. This method of costing basically deals with allocating and dividing the
cost to the different overheads of costs of the several departments and products. This method
for costing is been found more logical and practical for the allocation of cost. In this report
the activity method is been defined properly and also explained some of the details that are
related to this method. All the benefits and the disadvantage are covered in this report.
Research is been made on the basis of two article after understanding all the concept of the
activity method, and then research related questions are been framed. All the differences and
the similarity that are there is been discuss in the further part of the report. This method of
costing helps the costing management to deal with all the issue that is related to the
management costing. This method also tells us the ability to solve all problems that are
related to the costing of accounts. By analysis this report we can find out the role of the
activity based costing method in the organization. It plays a very important role as it is use to
find out the cost in the business, and cost is one of the important element in the running of the
business. Both the reports are provided to tell us the benefit or advantage of the using the
activity based costing in the business, and when we understood the use of this method
properly than we can apply this method in the different department of the business to manage
the cost of the business (Kaplan, et al. 2014).
Use of ACTIVITY BASED COSTING
The use of Activity based costing model is used to make the proper classification of
the cost in the process system of organization. It will help in identify the activity based
costing to identify the cost that company needs to manage. To identify the cost is the critical
step the complete process of the costing as it is not possible for the business to waste their
time of the big project that are assigned to them. However, ABC costing is used by the
Organizaiton which are facing the complex business process and costing methods (Gangwar,
Date, & Ramaswamy, (2015). The activity based costing is very simple process that every
business can follow it. In this model, the materials are been measured according to their cost
and this material are then given for the greater attention by the management department in the
organization
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The concept for adopting the activity based costing
 For example if we have to identify the cost that is related to the distribution channel
than there is no need for the business to find the research cost of the business as research cost
is related to the product not for the channel, after that the cost that is related to the advertising
and warehousing of the stock is been identified (Kaplan, et al. 2014). After that the cost that
are related to the service that are provided by the organization is been identified. After all the
cost than the secondary cost is been identified and that all depends upon the nature cost and
then it is been manage. The manager should understand the activity driver to manage the
secondary cost to primary cost and then to the different cost objects. The overall costs of the
quantity can be decreased by the management department by managing the cost driver of the
business.
 The activity based costing is also used to diversified the customers and there demand for the
product. In this method, the company calculates the cost of each resource that is used in the
business of each activity. The cost is given to the each item that is involved in the activity.
We can understand the use of the activity based costing with the given example that is been
explained below (Dale, & Plunkett, 2017).
Example: group A consist of items which content 70 to 80% of the inventory out of
which 5 to 10% of the total quantity is only held in the stock. Similarly the group B consists
of the item which content 20 to 25% of the inventory value but only 20 to the 30 % of the
total quantity. The rest of the item that are representing 5 to 10% of inventory but on the 60 to
70 % of the total are put into the group c. from this we understood that the group A consist of
the high value , B with the medium value and the C group with the lower value. The
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classification of this group is done of the basis of the different degree of the control over the
inventory. So we can say that the group A needs more control and management then group B
and then the group C. The management of the cost became so easy with the help of this
method of costing.
BENEFITS IN IMPROVISING THE PERFORMANCE
It is the best costing method which provides more logical way for absorbing the big cost
activities on the basis cost drivers in the particular department and business units.
It makes classification of the activity costing in the related process for the real cost overheads
(Kaplan, et al. (2014).
It overrides the issues and complexity of the traditional costing methods.
SOME INSEPARABLE DISADVANTAGES
 The type of nature and complexity of the business process may mislead the cost drivers for
the classification of the activity costing in the related process?
 After identification of these activities and cost drivers based on the consumptions and related
activities, department and set process is classified.
 ABC costing is only suitable for the big Organizaiton as it is high in cost and may requires re-
engineering of activities.
 Cost drivers would be different and unique in each and set of activities of the costing for
classification of the activity costing in the related process (Schaltegger, & Burritt, 2017).
STUDY 1: JOURNAL OF MANAGEMENT ACCOUNTING RESEARCH
The implementation of the activity based costing
PURPOSE
The implementation and adoption of the ABC costing model in the business process requires
key steps which will help company to strengthen the bifurcating of costing in different
process. It will not only assist in absorbing the big cost activities but also strengthen the
overall outcomes of the business by segregating the cost in different process. However,
adoption of the ABC costing model may require high amount of cash outflow which must be
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firstly consented by the board of the directors and related line managers (Schaltegger, &
Burritt, 2017).
 It may require management to pass resolution in the business.
 Cost and benefit analysis is need to be made before adopting the ABC costing model.
 Setting cost drivers will also be required for the proper level of classification of the business
costing model (Schaltegger, & Burritt, 2017).
 All the activities must be segregated on the basis of their nature, complexity and set program
and it will assist Organizaiton to set proper cost drivers for the classification of the activity
costing in the related process.
RESEARCH QUESTION
These two articles have focused on the use of the ABC costing model and its usages to make
classification of the activity costing in the related process. There are following research have
been made that is given as below (Bichou, 2015).
 What are the key steps that would be followed by Wesfarmers while adopting the ABC
costing model
 What is the role of cost drivers that will assist in classification of the activity costing in the
related process?
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STUDY 2: JOURNAL OF APPLIED MANAGEMENT ACCOUNTING RESEARCH
IS ACTIVITY BASED COSTING MODEL A SUCCESS IN AUSTRALIA
PURPOSE
In this study, the focus on the cost driver and adoption of the ABC costing has been analyzed.
The main purpose of analysing this article is that company first need to use the proper ABC
costing model then only it should only adopt the ABC costing model in the process (Kaplan,
et al. 2014). It is analyzed that Wesfarmers Company firstly needs to identify the cost
drivers of each and every activities then it should only set the classification of the costing in
different process. It is analyzed that adoption of the ABC costing model in Wesfarmers
should be based on the several process and stages which need to be adopted by following the
process (Bennett, & James, 2017).
 Initiation stage- It is the starting stage which focus on analysing the feasibility of the adopted
project. Company should understand first the benefit and cost associated with the process.
 Adoption of ABC Costing process: In this stage, adoption of ABC costing model is easy once
Wesfarmers could set up proper cost drivers in the process (Langfield-Smith, et al. (2017).
 Changes in the process and policies: Company first needs to use the proper ABC costing
model and implemented policies program which may assist in strengthen the overall
outcomes and implementing the proper work program (Frazier, 2014).
 Adopted activity based costing: Cost and benefit analysis, changing business policies and
setting cost drivers are some of the parts which need to be undertaken by the Wesfarmers
before adopting ABC model in its costing process (Kumar, & Reinartz, 2018).
The effectiveness of the ABC costing and its success in Australia is already way too high.
There are several big companies such as GE capital, Rio Tinto, BHP Billiton and Wesfarmers
that have indulged in using the ABC costing in its costing process. It has helped company to
develop the cost leadership strategy in business which has lower down the cost of the
business due to the structured classified costing process (Kaplan, et al. 2014).
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Source: https://www.google.co.in/url?
sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=2ahUKEwitj_C_1-
LdAhUHT48KHbBJA-YQjRx6BAgBEAU&url=http%3A%2F%2Fwww.loscostos.info
%2Fcost-accounting%2Fabc-costing.html&psig=AOvVaw1D-
1AxsJbL1GmIayLL_W1x&ust=1538395295592453
It has also observed that adoption of the ABC costing model is very much beneficial for
organization which is facing high complexity in its process system and costing methods
(Kaplan, 2014).
RESEARCH QUESTION
What is the required factor which needs to be considered by organization while adopting the
ABC costing model in process system?
What are the benefits and cost that will arise for the organization for adopting ABC costing
mode?
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SIMILARITIES AND DIFFERENCES BETWEEN THE TWO STUDIES
SIMILARITIES
These both articles have divulged the key details and benefits associated with the ABC
costing model and its implementation with the business process. It is analyzed that integrated
use of the ABC costing model is very much required to make the bifurcation of the costing in
the different departments (Kaplan, et al. 2014). These both articles have revealed that cost
drivers are the key factors for the classification of the cost of the different activities in the
process. It is analyzed that adoption of ABC costing model in the business Organizaiton
should be supported by the cost and benefit analysis (Sekaran, & Bougie, 2016). This
analysis will help in determining whether adopting the ABC model in the process will bring
the possible benefits to the process organization of company or not. Ideally, ABC costing
model is mostly suitable for the organization which is facing complexity and process issues
while classifying the cost activities in the different related units. In addition to this,
shortcoming, issues, problems and discrepancies related to ABC costing model have also
been divulged in both articles which will assist managers and other researchers to determine
the viability of the ABC costing model in the process (Gangwar, Date, & Ramaswamy,
(2015). The main summary of article one is that cost drivers are the main key factor which
will assist organization to make proper bifurcation of the cost activities and it should be set
accordingly on the basis of research and detail analysis. Another article has revealed that cost
drivers are already related to the particular activities and it would easy for the Organizaiton to
determine these cost drivers while classification of the cost in different process
(Subramaniam, & Watson, 2016).
DIFFERENCES
After evaluating these two articles, it is found that these both articles focused on using
the ABC costing in these process so that Organizaiton could use it to make the proper
bifurcation of the different cost in the related business department an units. The first article
focuses on the use of the ABC costing in the classification of the different costs in the process
system of Organizaiton and how it will strengthen the process costing and increasing the
overall outcomes for the Organizaiton which might face issue of the complexity and
cumbersome manual costing process (Kaplan, et al. 2014). This study has divulged the key
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understanding on the ABC costing model, related cost and benefits which might be availed
by the Organizaiton after adopting ABC model in the process (Najjar, Strickland, & Kaplan,
2017). This study will assist company to adopt the ABC model and changing the business
policies and rules which may strengthen the overall outcomes of the business in effective
manner. It will also assists in mitigating the process issues and determining the cost drivers
which may specifically help company to mitigate the process classification issues in the
costing process. On the other hand, another article has focused on the cost and benefit
analysis which may help in determining whether the adopted ABC costing models will
increase the costing of the process or will bring other several benefits (Bennett, & James,
2017). In addition to this, cost drivers are described for the better understanding on the
classification of the different cost of the process for the absorption of costing in the process.
This article has revealed that every costing process and classification of the same depends
upon the set cost drivers. If these cost drivers are not set accordingly then it might negatively
impact the business costing process if misleading data is used to make the classification of
process. In addition to this, regression analysis has also been used to set up the nexus between
the cost incurred for installing of ABC costing model and benefit arise from the same. It will
reveal the beta related with the both and margin changing moments (Ax, & Greve, 2017).
LEARNING OUTCOMES FOR THE MANAGEMENT ACCOUNTANTS FROM
THE TWO STUDIES
These below learning outcomes have been set which may help company to strengthen the
overall outcomes and use of ABC Costing in the business process of organization
(Sledgianowski, Gomaa, & Tan, 2017).
STUDY 1: JOURNAL OF MANAGEMENT ACCOUNTING RESEARCH
 There would be need of proper accountants and cost accountants who could understand the
process system and implemented developed plan for the ABC costing model in process.
 Company needs to align the use of the ABC costing model with the business efficiency of
process. It needs to ensure that adopting ABC model will lower down the process issues and
problems which may arise due to the complexity of the classification of the costing process.
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 Expert cost employees will be hired to implement the proper ABC costing model to
strengthen the costing classification model (Saccani, Perona, & Bacchetti, 2017).
 Proper set program for identifying the cost drivers and work functions will be set to
strengthen the use of ABC costing model in classification of the cost in process.
STUDY 2: JOURNAL OF APPLIED MANAGEMENT ACCOUNTING RESEARCH
 There should be proper support program and re-structuring of the business policies and
costing methods so that ABC costing method could be properly engraved in the costing
program. The activity based costing is also used to diversify the customers and there demand
for the product as it calculates the cost of each resource that is used in the business of each
activity. The cost is given to the each item that is involved in the activity.
 Company needs arrange the proper training and development program for its employees so
that they could get used to with the newly adopted ABC costing model in the business
process (Durán, & Durán, 2018).
 There has to make the proper feasibility analysis such as arrangement of finance, re-
structuring of the business activities and hiring more costing experts so that newly costing
method could meet the desired needs and outcome of the process. Furthermore, the manager
should understand the activity driver to manage the secondary cost to primary cost and then
to the different cost objects.
 Changing organization culture as per the newly developed process of organization (Dale, &
Plunkett, 2017).
CONCLUSION
Activity based costing is the main costing method which is used by complex business
organization to make proper classification of the activity costing to assign and absorb the
same costing in the different process of organization. It is considered that ABC costing is
only suitable for the big Organizaiton as it is high in cost and may requires re-engineering of
activities However, each and every organization before adopting and installing activity based
costing in the process needs to implement proper level of cost and benefit analysis so that it
could determine whether the adoption of activity based costing in the business process. It
simply helps company to lower down the cost of the production by classifying the total cost
in the particular process and department based on the related cost drivers. With the changes in
time, activity based costing is mostly use by the Organizaiton which have been facing issues
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