Analysis of the ABC Model and Its Application to Treasury Wine Estates

This report provides an analysis of the Activity-Based Costing (ABC) model as a management accounting tool, focusing on its application to Treasury Wine Estates (TWE), an ASX-listed wine company. The report explains the ABC model, its features, and its benefits, highlighting its ability to identify, assign, and describe costs to business processes, offering a more accurate cost management system compared to traditional methods. It examines how the ABC model aligns with TWE's goals and strategies, particularly in improving financial performance and cost optimization. The report recommends the implementation of ABC at TWE to enhance its cost management practices. Additionally, the report suggests the Balanced Scorecard as another suitable management accounting tool for TWE, which could help address performance measurement inadequacies by utilizing both financial and non-financial measures. The conclusion emphasizes that TWE can utilize ABC to replace its current standard costing to achieve key objectives like increasing profitability and improving financial performance.

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MANAGERIAL ACCOUNTING
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Executive Summary
This report presents analysis of ABC model as one of the management costing system and its
relation with Treasury Wine Estates. ABC is one of the most powerful tools used in
measuring an organization’s performance. It is utilized in identifying, assigning and
describing different costs to the agency operations or business processes. ABC is the multi-
level cost allocation technique where different costs are driven in stages; that is, from activity
to activity, and from one stage to the other. It is usually a more detailed technique to
attributing costs, first to their activities and to their cost objects which is said to create some
demand for such indirect costs. Based on the analysis, it was found out that Treasury Wine
Estate can utilize ABC in replacing it current standard costing, since the model could assist
the firm to doing better cost management which would in turn assist it achieve it key
objectives. Basically, increasing profitability or improving financial performance is a
complex thing for any firm, which has numerous aspects require to be considered. Hence, it
was found that ABC could assist Treasury Wine Estate making more profits that could in turn
assist in improving its profitability and sales level.

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Introduction
An increasing number of different forms are using the ABC in gaining some insights
into manufacturing processes and product process. With these, the report aims at
presenting what ABC is all about. It also aims to present its features and how the model
aligns with existing goals as well as strategies of one of the ASX listed company.
Additionally, the report would present some of the recommendations in implementing
ABC explaining how this model could improve management accounting information on
the company’s top management team. Finally, the report would explain other
management accounting tool which would be suitable for the company.
Explanation of ABC Model and Its Features
ABC is one of the management accounting tool indicating how different resources are
utilized by activities in producing products or outputs beneficial to clients (Bufi & Moilanen
2014). Besides, ABC is one of the most powerful tools used in measuring an organization’s
performance. It is utilized in identifying, assigning and describing different costs to the
agency operations or business processes (Innes & Kouhy 2011). The tool is said to offer more
accurate management costing system than the traditional costing accounting in identifying
available opportunities for improvement of the business processes efficiency and
effectiveness through determination of true costs of the services or products. Additionally,
ABC utilizes or employs cost drivers in assigning costs from different activities to the outputs
(Theriou, Theriou & Papadopoulos 2007). In other words, ABC is the multi-level cost
allocation technique where different costs are driven in stages; that is, from activity to
activity, and from one stage to the other. Further, ABC is said to encourages organization’s
management in evaluating cost-effectiveness and efficiency of the program activities. its

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main benefits is providing insights on the basis of past computed costs not only spending and
them applying similar information in making better decisions (Venieris & Cohen 2008).
ABC provide more accurate outlook on the reality since it recognizes that some of the costs
do not differ with volume measurement but with other measurements (Bufi & Moilanen
2014). It is usually a more detailed technique to attributing costs, first to their activities and to
their cost objects which is said to create some demand for such indirect costs. ABC offer
correct costing data features of being relevant and efficient. Since ABC focuses mostly on
the activities performed during production, it provides alternatives to traditional means of
accounting. According to Pineno (2002), ABC is a system that assesses different costs and
performance of capitals, costs objects and activities, assigns different resources to their
relevant activities as well as different activities to their cost objects on the basis of their use
as well as recognizes the causal relationships of the cost drivers to the activities. It is also
viewed as a technique of measuring different cost and presentation of cost objects and
activities. It usually assigns costs to different cost objects on the basis of the use of the
activities and assigns different costs to their activities on the basis of the use of different
resources. ABC provides some added advantages of at least reducing or evading alterations in
the product costing which is allocated as the indirect costs (Anand, Sahay & Saha 2005).
Besides, it offer useful information regarding how expenses occur, how cost-effect has been
distributed to different departments as well as how one might accomplish quality
improvements over its rivals.
The ABC comprises of two different stages; first, the ABC take into consideration that each
activity causes some costs, and assigns all the costs to their relevant activities (Velmurugan
2010). Such activities are said to take place in the cost pools or activity centres and are
usually evaluated by the cost drivers. Cost of such activities or resources are referred to as

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cost elements. In the second stage, the ABC take into account that different products consume
different activities and therefore costs incurred at particular cost pools or cost centres are
allotted to products on the basis of products consumptions of every activity as well as level of
these activities to ABC (Israelsen 1994). In order to accomplish such, cost drivers are said to
be closely dedicated to assigning different activity costs to the relevant products. Hence,
ABC captures factual cost bookkeeping by assigning the overhead outlays to different cost
centres as well as onwards to the output services or products. Besides, this model is
significant in refining processes both the logically and in the assessment role (Shane 2005).
This is because it determines activities performed by which organization’s resources and
attribute different costs to their relevant products on the basis of their utilization of these
resources.
ABC is mostly based on accurate procedures, which identifies specific activities or stages that
require taking place in determining the activity costs (Bufi & Moilanen 2014). Such stages
might have several applications as well as individuals options as shown in Figure 1 below.
Figure 1: ABC major activities

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Source: Μυτακίδης (2015).
ABC is said to report more accurate costs and therefore decrease any probability of the
management making poor decision on the basis of the available cost information (Anand,
Sahay & Saha 2005). To be more specific, the ABC improves managerial decision-making
process that is specifically crucial for different organization facing intense competition
(Angelis & Lee 1996). Besides, ABC measure more precisely expenses of different product
process and design involvedness. This implies that it assist product manufacturers to
understand some of the financial inferences of the design selection and therefore sway
conduct by accomplishing the design for the manufacturability (Oseifuah 2018).
Additionally, ABC is said to identify amount of the expenditures incurred on different
activities and therefore outline which particular activities are crucial for manufacturing. Here,
identification of activities which is crucial enhances introduction of the concept of the
continuous improvement. The ABC model recognizes that every client has his or her

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character and therefore the firm does not make similar profit from every client (Angelopoulos
& Pollalis 2017).
B) How ABC Model Aligns With the Current Goals and Strategies of Treasury Wine
Estate
i) Treasury Wine Estate’s Mission and Objectives
Treasury Wine Estate is the largest wine firms across the globe which is listed in ASX. The
firms is mostly focused on delivering high quality shareholders’ value vial production of
quality products and selling and marketing quality wine brands to different clients across the
globe. In other words, Treasury Wine Estate is an integrated wine firm focused on
premiumisation which is mostly supported by innovation as well as optimised brand. The
company is also committed to making some positive contributions to local communities
where it operates. Its mission is to be recognized as world’s most celebrated and successful
wine firm.
ii) Treasury Wine Estate’s Corporate Strategies
Treasury Wine Estate corporate strategies include building high performing firm by driving a
supportive, collaborative and inclusive culture. It also comprises of development of long-term
relationship through connecting with its clients, partnering with chief clients in growing its
wine category as well as driving performance for all its stakeholders. Another corporate
strategy by Treasury Wine Estate includes optimizing its capital base. This is to be achieved
by operating safely, responsibly and sustainably, creating supplying chain cost as well as
quality advantages. It is also accomplished by simplifying it processes and addressing high
cost structures. Besides, the company identifies the means it could improve the contributions

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to local communities by managing social and environmental risks as well as driving
sustainability.
iii) How ABC Model Assist in Achieving Treasury Wine Estate’s Strategies
The main objective and mission of the ABC is mainly to enhance organization’s management
decision-making through development of robust programs across the company with
sustainable data, reports, methodology and analyses. Besides, ABC assist in achievement of
higher quality services and products to the external and internal clients while driving toward a
more effective production of services and goods as well as more efficient performance of the
company’s activities.
C) Recommendations of on Implementation of ABC
Based on the company’s main objectives, it is recommended that Treasury Wine Estate should
make use of the ABC. This is based on the notion that ABC could assist in achievement of
higher quality services and products to the external and internal clients while driving toward a
more effective production of services and goods as well as more efficient performance of the
company’s activities. Furthermore, ABC assigns costs to different cost objects on the basis of
the use of the activities and assigns different costs to their activities on the basis of the use of
different resources.
d) Other Management Accounting Tool That is Suitable for Treasury Wine Estate
Other than the ABC, Treasury Wine Estate should utilize balanced scorecard as one of the
most suitable management accounting tools. This is based on the fact that BSC could assist
the company in addressing inadequacies of the performance measurement (Angelis & Lee

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1996). Besides, the BSC could assist Treasury Wine Estate in improving its decision-making
by utilizing both non-financial and financial measures and could also improve its
performance. This is based on the notion that the BSC emphasise needs of giving the
company suitable information in addressing all its applicable areas of the performance in a
manner that is unbiased and objective, to help the management in accomplishing and
formulating the strategic policies (Anand, Sahay & Saha 2005). In essence, employment of
the BSC would help Treasury Wine Estate in improving it strategies, resulting in improved
financial and economic performance. Furthermore, the BSC could assist the company by
offering sustainable information for their decision-making by setting clear objectives and
targets that might in turn assist in improving the company’s financial performance. Besides,
BSC comprises of tools which are significant for the company management since it
increases probability of a successful introduction of the strategy and accomplishment of the
business objectives and goals (Angelis & Lee 1996). BSC would also assist the company in
aligning the non-financial and financial measures which might in turn permit the
organization’s management in overviewing existing situation and then present innovative
perspective which could be utilized in interpreting different strategies for the growth into the
operative terms that the management is in a position to review financial performance in
numerous segments concurrently. It would also assist the company to continue improving
and creating value since it result in learning and innovative perspective where future succeed
today (Anand, Sahay & Saha 2005).
Conclusion
In conclusion, Treasury Wine Estate can utilize ABC in replacing it current standard costing,
since the model could assist the firm achieve it key objectives. Basically, increasing
profitability or improving financial performance is a complex thing for any firm, which has

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numerous aspects require to be considered. The ABC could assist Treasury Wine Estate
making more profits that could in turn assist in improving its profitability and sales level.
Furthermore, given the ABC would be of greater importance to Treasury Wine Estate, there
is need to also implement BSC. This is based on the fact that BSC could assist the company
in addressing inadequacies of the performance measurement. Besides, BSC is said to assist
Treasury Wine Estate in improving its decision-making by utilizing both non-financial and
financial measures and could also improve its performance. Additionally, BSC is also found
to assist the company in aligning the non-financial and financial measures which might in
turn permit the organization’s management in overviewing existing situation.

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