Report on Activity Based Budgeting for Keytone Dairy Corporation

This report provides a comprehensive analysis of Activity Based Budgeting (ABB) within the context of managerial accounting, using Keytone Dairy Corporation as a case study. The introduction defines managerial accounting and contrasts it with financial accounting, highlighting the signific...Read More

MANAGERIAL
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
(a) Description of Client Company........................................................................................1
(b) Definition and Features of Activity Based Budgeting (ABB)..........................................3
(c) Difference between Activity Based Budgeting and Traditional Budgeting Systems.......7
(d) Whether Activity based Budgeting is suitable for Keytone Dairy...................................8
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................12

INTRODUCTION
Managerial Accounting can also be defined as cost accounting and it can be said as it is
any process to identify, analyse, measure, communicate and interpret information to managers
for achieving the organizational goals (Prowle, 2016). The difference between managerial
accounting and financial accounting is that financial accounting helps in providing information
to parties that are outsider whereas, managerial accounting helps in decision making for
managers. This report deals with Activity Based Budgeting which is a type of Budget. In also
includes features, advantages and disadvantages of ABB. The Client Company which has been
taken is leading manufacturer of dairy products having registered in Australia. The comparison
with traditional budgets of Activity Based Budgeting is also mentioned as required by client.
MAIN BODY
(a) Description of Client Company
Name- Keytone Dairy Corporation Limited
Market Capital- 92.25 million
No. of shares- 150 million
Listing Date in Australian Stock Exchange- 18/07/2018
Registered Office- Sydney Australia
Vision Statement- They aim to provide first class products to whole world.
Keytone dairy was established in 2011 for the supply and production of fresh and
nutritional dairy products for international and local markets, manufactured and located in the
heart of the South Island (Key Stone Dairy Corporation, 2018). Keytone dairy current production
of 1500 tonne per annum has enabled them to target small and medium sized consumers.
Keytone is in expansion phase by adding their production capacity through development of
manufacturing sites. The first expansion will include a new industry of 1886 square metres and
will produce with annual capacity of 3500 tonnes. They source ingredients that are made in New
Zealand’s clean and pure environment. These products are sold by leading supermarkets as well
as used by manufacturers and retailers around the globe. They are manufacturing first class
products with premium ingredients. They are operating in dairy products segments of FMCG
products. Keystone is focused on powdered dairy industry with nutritional ingredients which is
having market of about US $21.4 billion and continue to grow. These products are produced
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under two brands i.e. “Key Dairy” and “Key Health” that includes premium milk and nutrition
powders as well as some of the beauty products (Key Stone Dairy Corporation, 2018). Keystone
is selling these products in multi form of packaging for meeting the needs of consumers in
today’s scenario. In addition to their brands, they are also manufacturing for other well-known
brands around the world. Their head office is based in the heart of city which in turn facilitates
transport connectivity rail road and port allows seamless logistics for the company. Keytone is
having a license of Certification and Accreditation Administration (CNCA). So, they can easily
export to China (Key Stone Dairy Corporation, 2018). They are holding a certification from
Federation of Islamic association which helps in selling there in products in Islamic countries.
Keytone has started selling their products in international markets in two brands which are:
1. Key Dairy- It includes all powdered milk nutritional products like skim milk powder,
colostrum milk powder, Kiwi fruit Milk Powder by using high quality products taken
from fine sources of New Zealand.
2. Key Health and Face Clear- In this brand, they provide the finest health supplement
capsules and the best natural beauty products.
Keytone is capable of manufacturing number of products in their personal brands, but
they also work in contract manufacturing business (Key Stone Dairy Corporation, 2018). Their
packaging is of different types which include sachets to bulk packing for industries. They are
experts in handling the requirements and logistics of their consumers globally. They are
supplying their bulk packaging throughout Australia and Asia. Some companies for which
Keytone does contract manufacturing are:
1. Woolworth (Countdown)
2. Alpine Milk Products
3. Metro
4. NZ Delight
5. Dairy Work
6. Natural Care
7. Kobe Beef Calf Milk Replacer etc.
The Latest Updates for Keystone are:
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1. They have started their construction for second manufacturing plant to increase capacity
to 5000 tonnes per annum for Keytone Dairy products. The second manufacturing unit
may start during first half of 2019.
2. Listing of Products in Shanghai First Food Mall-: As they have license to sell their
products in China, they have started selling their products in Shanghai First food mall
which is having 12 Metropolitan Scale Stores.
3. Launching of Dairy Proprietary AMF product- They have launched their first Wet
Products in brand Key Dairy, Anhydrous Milk Fat in 18Kg tin for supplying in South
East Asia and china. This milk contains 99.9% milk Fat.
To achieve their vision, they are applying different strategies which are:
1. Expanding their production capacity to provide higher volume to consumers
2. Expansion of product range through in house and contract manufacturing
3. Increasing their distribution channels
4. Exporting of products to different countries
The customer base of Keytone Dairy is not only in Australia and New Zealand but
around the globe (Key Stone Dairy Corporation, 2018). There in house products are sold across
Asia, Europe and their base countries. Keytone is working with different retailers, wholesalers
and industrial consumers.
(b) Definition and Features of Activity Based Budgeting (ABB)
Activity Based Budgeting is any system where researching, recording and analyzing is
done according to the cost of activity. This method of budgeting provides more transparency in
the process of budget (Gurcanli, 2015). ABB can also be defined as it is a planning system in
which costs are associated according to their activities and afterwards, budgeted expenditures are
compiled on the basis of level of expectation. ABB focuses on volume and types of activities that
occur within any business. The outcome of using method is that in can reduce the level of
activities that are extra provided to manufacture any product (Activity Based Budgeting, 2018).
This method can also be helpful for checking how much cost is associated with each activity and
by this, they can decide where to allocate more funds (Noreen, Brewer & Garrison, 2014).
By this method, any company can enhance their cost structure. This budgeting technique
must be applied only when Activity Based Costing method has been used to calculate cost as
identification of cost drivers would have already been done there. In this method budgets that are
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prepared using ABC after consideration of overheads costs (Oseifuah, 2014). In, simple words
we can define it is a management tool that doesn't consider the past year budgets. The different
activities are analyzed and cost are allocated on that basis. It provides optimum utilization of
resources (Prowle, 2016). It starts with output than determines the activity that are necessary to
create that output and then determine resources that are available for it. ABB focuses on
activities that are performed rather than functions. Following are the features of Activity Based
Budgeting:
1. The total budget is divided in two types that are variable and fixed which are necessary
for providing quality information for designing a suitable budget system in any
manufacturing concern. Cost drivers are needed to be identified in a proper manner for
adding an overhead to that activity (Krumwiede & Charles, 2014). Cost drivers address
the pattern of activity for which budget has been made.
2. Different activities are identified and afterwords are ranked in order of priority
3. Resources which are available are directed towards priority to ensuring optimum results
4. Activities that are founded are evaluated as per systematic analysis of management
Example of Activity Based Budget
There are two setups for making a cell phone that are Machining and Assembling.
Managerial accountant first would be looking total amount of mobiles that are to be produced
and then he will define activities for producing cell phones. The activities can be:
1. Number of mobile phones in each batch
2. Setup time for machining
3. Setup time for Assembling
4. Hours required to do that work
So, after looking into all activities, managerial accountant can come up with effective
utilization of resources that would save money of company.
Budgets are made with two approaches
1. Top Down Approach-: In which top management decides and create budget that how
much and where to spend cost (Kazemi & Zadeh, 2015). The suggestion are taken from
managers before preparation of Budgets and are made according to objective of
organisation.
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2. Bottom Up Approach-: In this approach, managers prepare budget according to their
departments and the past experience (Prowle, 2016). This approach begins with
identification of different operations and tasks that are performed by organization. Each
unit will disclose resources and utilization of funds. The approach used by Activity Based
Budgeting is Bottom up Approach.
Following are the pros and cons of Activity Based Budgeting:
Advantages
1. This budgeting process can provide useful information to total quality management
(TQM) relating to the cost of activity that is required to any level of service (Pazarceviren
& Celayir, 2014).
2. It recognizes all cost drivers so that management can control causes that are created and it
can better be managed and understood.
3. Creates attention for cost of overhead activities that are in large proportion of total costs.
Disadvantages
1. Identifying cost driver and then allocating to different activities may be difficult.
2. Time and heavy efforts are required to establish the key activity.
3. Short term overheads can't be controllable through this method of budgeting.
Following is the process of Activity Based Budgeting:
1. Identification of activities and their cost drivers
2. Forecasting of number of units and required level of cost driver for that activity
3. Calculation of cost driver rate
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Identification of Cost Objects
Ex: Products Services Customers
Identification of Cost Drivers
Ex: Selling, Administrative, customer relation management
Consumption of Resources

Activity Based Budgeting as a Management Tools
1. Helps in assessing actual progress for the evaluation of cost
2. Identify any critical events of projects and helps in setting up milestones for cost
3. Clarify the range and level of expenses that are incurred to stakeholders
4. Managing three key factors that are time, money and purpose of cost
5. Helps in assessing any risk that is associated with costs
Example of Activity Based Budgeting:
Activities Receiving
Raw
Material
Issue
from
Factory
Ordering
of Raw
Material
Stock
counting
Keeping
Records
Supervisi
on
Total
Cost
Driver
No. of
Deliveries
Store
Requisitio
ns
Number of
Orders
Number of
counts
Managem
ent Salary
0 0 0 2 6 30 38
Basic
Wages
25 30 10 5 12 0 82
Overtime
Payments
10 0 0 15 0 0 25
Stationery 1 3 5 6 2 2 19
Others 5 7 2 1 5 2 22
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Calculation of Cost per Activity

Activities Receiving
Raw
Material
Issue
from
Factory
Ordering
of Raw
Material
Stock
counting
Keeping
Records
Supervisi
on
Total
Total 41 40 17 29 25 34 186
Cost per
Activity
80 40 25 100
These figures taken are hypothetical and only for presenting an example of Activity
based Budgeting.
(c) Difference between Activity Based Budgeting and Traditional Budgeting Systems
Traditional Budgeting method in which preparation of budget is done by taking base of
previous year. Current year budget was prepared by adjusting expenses based on inflation rates.
In the past, traditional budget was preferred as it was based upon incremental approach (Parker,
2016). These budgets are very easy to prepare as these are made with the past data which are
easily available. Traditional budgeting is mostly used in small firms as they don't have many
overheads to be included into budget (Traditional Budgeting, 2018). Following are the
differences in between activity based budgeting and traditional budgeting:
1. Traditional Budgeting Method is a process where planning of budget is made taking a
base to prepare the budget. On the other hand, ABB is a technique where each time
budget is created and activities are evaluated as per their cost drivers.
2. Traditional Budgeting gives stress on expenditures of former period whereas ABB’s
concentration is on making new economic proposal.
3. Traditional Budgeting can be said as it is a part of accounting and based on basic
accounting principles whereas, ABB is a decision oriented process.
4. In preparation of traditional budget, any justification for existing project is not required
but in ABB, justification is needed by departments of proposed budget for effective
utilization of resources.
5. In terms of clarity, ABB is very much better than Traditional Budgeting.
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6. Activity Based Budgeting follows straightforward method whereas, traditional budgeting
follows a routine approach.
7. In traditional budgeting, the references are taken from previous spending levels and
afterwards, they consider if any inflation in prices but in ABB, the costs are based on
priority and are according to their relevance.
8. In preparation of traditional Budget figures for assumption are taken from previous years
whereas in ABB it is estimated as per different department and current market trends.
9. Traditional budgeting is not cost effective whereas, ABB’s main purpose is cost
effectiveness.
10. Traditional budgets are based on historical information that has been provided whereas,
ABB is based on estimated information.
11. Traditional budget is simpler when it comes for the preparation of budget as compared
with ABB.
12. The base of Traditional Budgets are that they are involved around accounting process of
organization whereas ABB orientation is depended upon projects.
(d) Whether Activity based Budgeting is suitable for Keytone Dairy
Activity based Budgeting is any method which provides transparency to budget process.
It is the most basic form of budgeting wherein expenses which are generated and are allocated
directly to its activity. Activity Based Budgeting is a system wherein costs that are associated
with activities are allocated according to their level of expectation. It provides a high degree of
refinement in planning of cost (Gurcanli, Bilir & Sevim, 2015). The outcome for this budgeting
is that it helps in reducing activity levels which are required to complete any process which in
turns provide profits to any company. ABB provides detailed knowledge of cost structure and
they can manage it accordingly. ABB is a long exercise to find out cost of each and every
organization as well as assess addition in value for the same (Noreen, Brewer & Garrison, 2014).
The cost drivers are responsible for defining any activity related to cost. So, cost drivers are any
factor which influence and contribute to different business operations (Activity Based Budgeting,
2018).
Determining cost drivers is essential because it allows determination of cost that is
needed to perform activity at different levels. Activity Based Budgeting is mostly found in the
cost accounting (Oseifuah, 2014). Managers of any company prepare budgets and proposition to
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spend according to their past activities. ABB not only saves money of company but also helps in
examination of each and every activity. It allows management of any company to have increased
control in budgeting process which will help in achieving the organizational goals.
The process to prepare an activity based budget can be:
1. Determination of no. of units that are related to that activity
2. Calculate cost per unit of activity and multiply it with no. of units.
Activity Based Budgeting is totally based on Activity Based Costing as this method can
estimate different cost elements to calculate the cost of product (Kazemi & Zadeh, 2015). The
Activity Based Costing can help in:
1. Identifying and eliminating products that are not profitable and are overpriced.
2. Elimination and identification of production process that is ineffective. ABC costing
involves in identification of cost drivers to different activities and which helps in creating
activity based budgeting. So, main problem of determination of cost driver has already
been done with the help of ABC costing. Keystone Dairy Corporation must use Activity
Based Budgeting as a tool to create budgets because there are multiple activities that are
involved in production of dairy products. So, allocation of cost is necessary to every
activity that is used in the manufacturing process (Krumwiede & Charles, 2014). This
will help in knowing the actual cost of production of any product and actual cost in
different activities that are involved with it. Following can be the activities that are
involved in manufacturing process of dairy products by Key Stone Dairy-:
1. Collection of Milk-: Milk collection will be the first activity for any Keytone to start
there manufacturing process. So, different costs that are involved in it can be:
1. Salary for staff to collect the milk
2. Contract with Milk Man for providing milk
3. Keeping Records, etc.
2. Receiving of Milk-: There should be a section where milk is kept and stored. Costs
associated it with are:
1. Cold Storage for keeping milk
2. Salary and wages for operation of Cold Storage
3. Supervision, etc.
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3. Transformation of Liquid Products- Milk that had been purchased from market are to
be transformed or processed for making consumer milk, chocolate milk etc. The costs
that are involved here are:
1. Salary and wages for operation of plant
2. Machinery related expenses
3. Counting of Stock
4. Keeping Records Supervision, etc.
4. Processing of Milk into different products that are milk powder, Ghee, Butter etc. So,
here costs that are involved in each product will be activities for that product like for
making ghee, the cost drivers will be all the expenses which are related to manufacture
that product.
1. Record Keeping
2. Stock Counting
3. Repairs and maintenance of plant and machinery that
4. Wages and salary for staff.
5. Cost of Supervision etc.
So, with the help of Activity Based Budgeting, different cost drivers are determined for
different activities. It will help Keystone in determining the cost of each activity through which
they can use resources at optimum level and eliminate the costs that are ineffective.
CONCLUSION
From the above report it can be concluded that activity based budget is better form of
budgeting as it helps in finding different activities by which cost can be allocated. It can be seen
in the report that the cost drivers are key for activity based budgeting. This project report
concludes regarding use of Activity Based Budgeting in Keytone Dairy Corporation. Besides
this, it can be inferred that activity based budgeting will help in effective utilization of resources
in client company. Moreover, it provides high level of assistance in avoiding redundant business
activities and thereby facilitates cost reduction and profit maximization. Hence, it can be stated
that ABB is highly prominent which in turn helps in making optimal use of financial resources.
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REFERENCES
Books and Journals
Gurcanli, G. E., Bilir, S., & Sevim, M. (2015). Activity based risk assessment and safety cost
estimation for residential building construction projects. Safety science. 80. pp.1-12.
Noreen, E. W., Brewer, P. C., & Garrison, R. H. (2014). Managerial accounting for managers.
New York: McGraw-Hill/Irwin.
Oseifuah, E. K., 2014. Activity based costing (ABC) in the public sector: Benefits and
challenges. Problems and Perspectives in Management. 12(4). pp.581-588.
Krumwiede, K. R., & Charles, S. L. (2014). The use of activity-based costing with competitive
strategies: impact on firm performance. In Advances in Management Accounting (pp.
113-148). Emerald Group Publishing Limited.
Kazemi, Z., & Zadeh, H. A. (2015). Activity based Costing: A Practical Model for Cost Price
Calculation in Hospitals. Indian Journal of Science and Technology. 8(27).
Prowle, M. (2016). The changing public sector: a practical management guide. Gower.
Pazarceviren, S. Y., & Celayir, D. (2014). Target costing based on the activity-based costing
method and a model proposal. European Scientific Journal. ESJ. 9(10).
Parker, L. D. (2016). From scientific to activity based office management: a mirage of change.
Journal of Accounting & Organizational Change. 12(2). pp.177-202.
Online
Key Stone Dairy Corporation. 2018. Online Available Through
<https://www.keytonedairy.com/our-company/our-vision/>
Activity Based Budgeting. 2018. Online Available Through
<https://www.accountingtools.com/articles/activity-based-budgeting.html>
Traditional Budgeting. 2018. Online Available Through <https://budgeting.thenest.com/define-
traditional-budgeting-24338.html>
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