ABC Costing Method Analysis: Pearson Company & ABC System

This assignment analyzes the Activity-Based Costing (ABC) method, comparing it to traditional costing approaches within the context of managerial accounting. It explores how ABC provides more accurate product costing, aids in planning, decision-making, and controlling functions within organizations. The assignment discusses the advantages of ABC over conventional labor-based systems, detailing the shift from accurate product costing to cost planning and reduction. It covers the impact of ABC on cost-volume-profit analysis, emphasizing its role in strategic decision-making by providing a comprehensive understanding of cost behavior and allocation. The document includes examples and numerical data to support the effectiveness of ABC in different scenarios. The assignment is based on the assignment brief of Arab Open University B292: TMA – Fall Semester 2018/2019.

ABC costing
ABC Costing Method
ABC Costing
Name of the author-
University Name-

PART A: MANAGERIAL ACCOUNTING FOR PEARSON COMPANY
WHAT IS MANAGEMENT ACCOUNTING?
Management accounting is usually undertaken by a managerial accountant in any
organisation. This form of accounting comprises the function of preparation of several
accounts and reports that are required to make decisions for entity’s short-term and long-term
period. The accounts and reports relate to the statistical and financial information of the
results generated by the organisation. The managerial accounting differs from financial
accounting on the ground that the reports under managerial accounting are prepared for the
internal management of the organisation and not for the external and controlling shareholders
(Weygandt, Kimmel, & Kieso, 2015). Further the report and account preparation is done
either on weekly or monthly basis rather on quarterly and annual basis. The accounts that are
prepared relate to the organisation’s accounts receivables and payables, cash balances, sales
revenue, inventory, raw material, order status, and etc. The various sort of variance analysis
being charts, trend charts, data statistics, bar graph comparisons, etc. also comes under
managerial accounting (Noreen, Brewer, & Garrison, 2014).
HOW MANAGEMENT ACCOUNTING HELPS ORGANIZATIONS IN PLANNING,
DECISION MAKING AND CONTROLLING FUNCTIONS?
Management accounting provides the internal management being the Chief Executive
Officers, and the departmental heads with several of reports and accounts. These provide the
heads with an insight about the working pattern of the company. This helps in the making
plans for achieving the short term and long term goals of the company (Butler, & Ghosh,
2015). The problems that the entity is facing currently can be identified, and thus it shall help
to make a plan in that direction itself. After the plan is set with the help of the results shown
by the managerial accounting process, the organisation can staff responsibilities as per the
skills that different employees have in the entity. Through proper organising the lines of
responsibility and authority can be properly set. The company’s sales, and purchase pattern
can be analysed that can help in understanding whether every responsible person is
performing duties as per the level expected out of them (Wiley, 2009). This has shown how
management accounting needs to be supported by the activity based costing model.

Through the function of management accounting, the entity can measure the results with the
performance targets that have been set in the entity. A close monitoring can be made that can
help in the measurement and evaluation of the results that have been achieved. This shall help
in identifying the variances. Feedbacks obtained from different departmental heads can help
in further deciding a correct path of action plan. In the end accurate decisions can be taken by
the organisation based on the results of the monitoring in the same line where any
improvement or innovation is desired. All the available alternatives can be compared and the
best one shall prevail in the entity’s operations (Eldenburg, Wolcott, Chen, & Cook, 2016).
PART B: THE ACTIVITY BASED COSTING
1. Why change to ABC? What is different about the competitive, product, and process
environment today that would cause a company to consider implementing an ABC
system?
The ABC method provides more accuracy when it comes to costing individual products. The
reports that are formulated by using the ABC technique provide clearer results about the
costing patterns. A competitive edge is provided to the entity by using this technique over the
firms that are still using the traditional costing methods (Dale, & Plunkett, 2017). ABC
method has gained importance in the business market due to the revolution and it has become
easy for the organization to determine the cost drivers based on the same.
The business environment nowadays has changed drastically. Earlier the businesses mainly
focused on specialising a single product and monopoly used to exist. Nowadays the wings of
competition are widespread and every other business is working in the same line to achieve
what the others could not. Such environment demands the business houses to price their
products after keeping adequate profit margin levels. This can be done only when the
accurate cost of the products is known to the organisation. The activity based costing method
provides the most accurate costing price. Even the forecasts that are made for the future, if
use the activity based costing technique to allocate the overheads, then a better and much
clear idea can be obtained. Mostly, in today’s environment of business the two most required
and essential factors that helps in achieving success are the good quality of production and
reduced cost of production (Goetsch, & Davis, 2014).

2. Give examples of how an ABC system can result in more reliable products costs than
conventional labor-based product costing system.
The conventional labour-based product costing method provides the results that are
less accurate than the ABC method. The costs are assigned in a manner which is haphazard
and based on budgeted cost driver amount. The cost driver used is mostly the direct labour
hours. All the process is much hypothetical. However, the activity based costing method
makes use of the real cost drivers that are responsible behind any cost expenditure (Kaplan, &
Atkinson, 2015). The division basis is realistic and relate to the overhead expenditure that is
being apportioned. The below given images have been shown to identify the material
examples for providing the use of the ABC costing in the business (Wiley, 2009). If this ABC
costing model is used with the accurate cost drivers then it will help company to strengthen
the bifurcation in the different process and system of organization. The below given example
helps in evaluating how it could strengthen the overall costing method in organization.
The numerical example is depicted below:

The above table clearly shows that the activity based costing method has provided the per
unit cost results of all the products in a much accurate manner than the conventional labour
cost method (Kim, 2017).

3.Why did the use of ABC change from a focus on generating more accurate product
cost numbers to a greater emphasis on its use for cost planning and cost reduction?
Earlier, ABC method has gained importance in the business market due to the revolution it
has brought in the field of allocation of the overhead costs. The business houses used to adopt
this method for bringing fairness in the method of cost disbursements. But with the
innovation brought in the market and the rise in the competitive environment, the main aim
nowadays is to reduce the costs of production. This is the only way that can help in increasing
the profit level of the organisation. Using this technique provides the organisation with the
pattern that the individual product costs are following over the years. Through this trend
analysis, the company can plan into the future operation of the entity. The planning into the
company’s product costing shall be beneficial for the entity in a manner that it provides
accurate cost sheets that can help in understanding the cost behaviour. So it is right to say that
the focus which was earlier to generate accurate costs has now drifted to proper cost planning
and reduction in costs (Christopher, 2016).
4. Explain briefly how activity-based costing (ABC) affects cost-volume-profit analysis.
The cost volume profit analysis is used to identify the cost associated with the production,
contribution per unit and net profit earn by the company. Cost volume profit analysis helps to
understand the relationship that exist between the changes that happen in the operating costs
of the products and the change that takes place in the company’s net income and operating
profits. For using the cost volume profit analysis the managers require accurate costing data.
The use of conventional methods can provide inconvenient and misleading results to the
organisation in this situation. The results that the activity based costing method generate can
be wonderfully used in doing the cost volume profit analysis. This is so because the
organisation can easily rely on the reports that are generate by the ABC method rather than
the traditional costing reports. The ABC method helps to judicially bifurcate the costs as per
their cost patterns. This helps in analysing the results in more rational and beneficial manner.
The cost that are related to volume and that are not related to the volume of production can
also be differentiated (Plank, 2018). Therefore, ABC costing helps in allocation of the cost
and absorption of the same in different busienss units. It is done with a view to strengthen the
busienss outcome. However, before implementing the ABC costing method, company needs
to identify the proper job allocation drivers so that proper costing could be made in different
departments.

REFERENCES
Butler, S. A., & Ghosh, D. (2015). Individual differences in managerial accounting judgments and
decision making. The British Accounting Review, 47(1), 33-45.
Christopher, M. (2016). Logistics & supply chain management. Pearson UK.
Dale, B. G., & Plunkett, J. J. (2017). Quality costing. Routledge.
Eldenburg, L. G., Wolcott, S. K., Chen, L. H., & Cook, G. (2016). Cost management: Measuring,
monitoring, and motivating performance. Wiley Global Education.
Goetsch, D. L., & Davis, S. B. (2014). Quality management for organizational excellence. Upper
Saddle River, NJ: pearson.
Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting. PHI Learning.
Kim, Y. (2017) Activity Based Costing for Construction Companies. Oxford :Wiley & Sons Ltd,
Noreen, E. W., Brewer, P. C., & Garrison, R. H. (2014). Managerial accounting for managers. New
York: McGraw-Hill/Irwin.
Plank, P. (2018). Introduction. In Price and Product-Mix Decisions Under Different Cost
Systems (pp. 1-5). Springer Gabler, Wiesbaden.
Walker, J. (2009) CIMA Official Learning System Fundamentals of Management Accounting:
Fundamentals of Management Accounting (2nd ed). Elsevier: Oxford.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & managerial accounting. John
Wiley & Sons.
Wiley, J. (2009) Accounting: Tools for Business Decision Making (3rd ed). Business & Economics :
USA.