ABC Model: Costing Analysis for Corporate Travel Management

This report provides an analysis of the Activity Based Costing (ABC) model and its application to Corporate Travel Management (CTM), an Australian-based company. The report begins with an executive summary, followed by an introduction to the ABC model, defining its meaning and key features. The report then aligns the ABC model with CTM's mission, objectives, and corporate strategies, including growth, innovation, productivity, and leveraging scale. It identifies the benefits of applying the ABC model within CTM, particularly in improving cost allocation accuracy. Recommendations are provided for the implementation of the ABC model, along with an alternative management accounting tool, Total Quality Management (TQM). The report concludes by summarizing the findings and emphasizing the importance of ABC in enhancing CTM's financial management and strategic decision-making.

Corp Travel Company
ACTIVITY BASED COSTING
MODEL
Costing Methods
Name of the Author

EXECUTIVE SUMMARY
The current report focuses on the implications that the Activity Based Costing model
technique can have on the information provided to the top management under managerial
accounting. For the same, the example of a leading Australian company, Corporate Travel
Management is taken. By management team, it means CEO and the other senior managers.
The initial part of report emphasises on the meaning that the ABC model pertains to and the
features that adorn it. Strategies and current goals of the above-mentioned company are
identified along with its mission and objectives.

Table of Contents
INTRODUCTION.................................................................................................................................3
ACTIVITY BASED COSTING MODEL.............................................................................................3
MEANING........................................................................................................................................3
FEATURES OF ACTIVITY BASED COSTING.............................................................................3
ALIGNING ABC MODEL ACCORDING TO MISSION AND STRATEGIES OF CORPORATE
TRAVEL MANAGEMENT..................................................................................................................4
MISSION AND OBJECTIVES OF COMPANY..............................................................................4
STRATEGIES OF CORPORATE TRAVEL MANAGEMENT.......................................................4
CONTINUED GROWTH AND SERVICE EXCELLENCE........................................................5
CLIENT FACING INNOVATION...............................................................................................5
PRODUCTIVITY AND INTERNAL INNOVATION..................................................................5
LEVERAGING SCALE AND GEOGRAPHY.............................................................................5
THEIR PEOPLE............................................................................................................................5
BENEFITS IN APPLYING ABC MODEL IN CORPORATE TRAVEL MANAGEMENT...........6
RECOMMENDATION FOR IMPLEMENTATION OF ABC MODEL IN CTM...............................7
ALTERNATE MANAGEMENT ACCOUNTING TOOL RECOMMENDED....................................8
Conclusion.............................................................................................................................................8
References...........................................................................................................................................10

INTRODUCTION
Activity Based Costing is the most celebrated tool in managerial accounting, especially in the
manufacturing sector. As the name suggests, the cost allocation under this technique is based
on the relationship between the activities that the concern does and the respective products. It
is an improved method over the traditional approaches of cost allocations. In this approach,
the level of activity is the measure of the distribution of indirect costs, as the direct costs are
already attributable to the specific activities or product. In the report under study, the
company chosen for analysis is Corporate Travel Management, one of global giant corporate
that customises the travel needs of businesses. This report highlights the company’s missions
and objectives with its corporate strategies. The role of Activity Based Costing model in
improving the management accounting and the recommendations related to the same are
versed. The ABC model is incorporated to understand how it can help the corporate to
achieve its corporate strategies and recommendations for the same are given in the second
part of the report, based on the research findings. In the concluding section,
ACTIVITY BASED COSTING MODEL
MEANING
Any kind of activity or production or business incurs both direct and indirect costs in the
process. Indirect cost is not directly attributable to any output, are required to be divided on
some justified basis. Activity Based Costing has come as a saviour by judicially attributing
cost based on resources used by each activity and the total cost incurred. Various bases are
used as a base for distribution and are known as cost drivers, e.g. power consumed, machine
setups, maintenance request, production order etc. Here in this method, the machine hours or
direct labour hours are not used as a basis for allocation. It is the much-improved manner of
disbursement as it’s directly linked to the extent a department or section performs an activity
which generates a cost (Lee, & Kao, 2011). It is observed that if the proper ABC model
costing is used then it will increase the overall outcomes and efficiency of the business at
large.

FEATURES OF ACTIVITY BASED COSTING
Activity Based Costing model is concerned with dividing the indirect costs incurred in the
production or in providing any service. Any cost is either a fixed cost or a variable cost. A
similar situation is there in indirect cost. So firstly, the ABC model divides the cost incurred
into two parts- fixed part and a variable part. The fixed cost is bound to be incurred
irrespective of any work being done, whereas the variable cost varies with production or
activity pattern. Each kind of cost is properly analysed to distinguish the different patterns of
cost behaviour. Unlike the traditional methods based on machine/labour hours, the ABC
model distinct the cost behaviour patterns based on volume, diversity, events and time. Based
on cost behaviour pattern, the activity/cost drivers are selected which may be maintenance
requests, machine setups, the power consumed, quality inspections or purchase orders, and
ultimately each cost is allocated based on it (Manunen, 2010).
Due to this, the departments which are less activity oriented do not bear a high burden of
costs and this ensures that both cost and time of the concern is saved in the allocation of true
costs to different departments. This shows that company will increase its outcomes if proper
ABC models are used.
ALIGNING ABC MODEL ACCORDING TO MISSION AND STRATEGIES OF
CORPORATE TRAVEL MANAGEMENT
MISSION AND OBJECTIVES OF COMPANY
The mission of CTM is to conduct business in a manner which is correct in the eyes of
environment, community and people and striving the business sustainably. It thrives to
provide the customers with fair value with utmost quality and invest in the skills of
employees. It even backs several charitable institutions. It wants to get fundamentally strong
by delivering maximum return on investment to clients and customise innovative practices
for them (Stouthuysen, et al. 2010).
Being an eleven-time AFTA award winner for being the best corporate travel management
company of Australia, the objective of the company is to further increase the client base and
continue to provide the high-quality services and be in the top of the corporate travel
management companies. It strives to excel at providing travel solutions to the clients and to
further reduce the cost of using the latest technology (Tsai, et al.(2013).

STRATEGIES OF CORPORATE TRAVEL MANAGEMENT
What makes CTM different from other travel management companies are its business
strategies that are core to its success. The strategies have made CTM functions flexible rather
than rigid. Various strategies are being followed by the corporate, but some of the major
strategies are discussed as below (Angelopoulos, & Pollalis, 2017)
Growth and service Excellency
The main motive of CTM as discussed earlier is to excel in the field of the service that they
provide, i.e. managing corporate travels mainly. There is no outsourced managing team, but a
localised team for better experience and ease of service utilization. They try to innovate the
services to be provided as per client needs and focuses on reducing the expenditure to be
made by the client. This ensures higher returns and value of expense. Travel safety is a pre-
requisite in every service extended. Various mergers and acquisitions opportunities are also
in the line of execution (Christopher, 2016).
Innovation for clients
It is observed that developing new tools with an understanding of client needs and
implementation of smart technology globally. CTM wants to address local or regional market
needs with the development of tools through localised technology centres (Corp Travel
Limited)
PRODUCTIVITY AND INTERNAL INNOVATION
The focus is to improvise and innovate the existing clients and non-client facing processes
through internal innovation tactics. To ensure higher efficiency from the employees, the trial
is to provide the staff with authority to take more decisions than past to make them more
engaged and involved. This eventually will result in the better provision of services to clients
(Dale, and Plunkett, 2017).
LEVERAGING SCALE AND GEOGRAPHY
To smooth out the whole client experience, CTM is trying to optimise supplier performance
by demonstrating the higher value of self in the whole supply chain (Fagnant, and
Kockelman, 2014).

THEIR PEOPLE
More emphasis is to be powered by the staff and employee team in terms of education and
training to develop and retain them. To maintain harmony, various cultures and diversities are
to be comprised in the entity’s environment. This will work favourably in the service that will
be served to the clients (Ganorkar, Lakhe, & Agrawal, 2018).
BENEFITS IN APPLYING ABC MODEL IN CORPORATE TRAVEL MANAGEMENT
The question is whether ABC model will assist in achieving the strategies of the concern or
not. As per the extract of the reportable segment taken from the Annual Report of 2015 of
CTM, it is evident that the company has divided the segments on geographical basis (New
Zealand and Australia; North America; Asia; Europe; Other) and not on the kind of service
extended, as the company also provide travel solutions for leisure, sports, events etc. other
than business ones. The kind of reporting that company has followed does not state the
different types of travel solutions provided in each geographical area. The total distribution of
costs is based on the resources used by each geographical location based on the straight line.
Although ABC model is much preferred for the manufacturing sector, in the case of service
industry like CTM, this model can help to provide a better understanding of the actual
performance at each kind travel type in each geographical area (Gerwin, Norinsky, &
Tolwani, 2018).
In the kind of disbursement done by CTM, the cost allocation is not proper and misguiding as
there are no references to cost with the level of service provided (Lee, & Kao, 2011). The
allocation is based on the total amount of installation and not the basis of the actual run. This
will even help in attaining the strategy of cost reduction (Hofmann, & Bosshard, 2017).

(Corp Travel Limited, 2017)
As discussed before, by using ABC technique the, the cost related to each kind of travel
managed shall be first bifurcated into the fixed and variable element. Fixed cost shall be the
unavoidable expenditure and the variable part shall contain the output related costs. After
doing the bifurcation, CTM shall understand the cost behaviour and mark cost drivers. Based
on those cost drivers, the indirect cost shall be allocated to each department (Hsieh, & Lin,
(2014).
RECOMMENDATION FOR IMPLEMENTATION OF ABC MODEL IN CTM
As it’s evident that CTM is not following Activity Based Costing model, it’s suggested to
adopt the same by separately analysing the different kinds of services offered in every
geographical location. This will help CTM to get an overall idea of all the services that
consume the resources and add to cost occurrence. By having a clear understanding of all the
services, a base will get ready among which the costs are to be divided. For this, the client list
should also be updated (Keehan, et al. 2015).
Due to change in the method of costing, the work process for the staff shall also undergo
some changes. This will call for some enrage in them. To avoid it, the management should
provide the staff with a complete brief about the method and the way it shall be followed.

Presentations should be made and communicated clearly to the employees. Accountants
should be trained according to the new procedure and the queries should be invited.
The ABC model should surely be implemented and followed, but with proper understanding
and clarity. Feedbacks should be promoted from staff for understanding the scope of
improvements or the areas of errors (Mouseli, et al. 2017).
Recommendation for the Alternative accounting model
According to the analysis of the strategies and mission of CTM, TOTAL QUALITY
MANAGEMENT is the most appropriate management accounting tool that can be followed.
In this technique, both employees and management join hands to create an organisation
whose main motive is to make continued efforts to maintain the customer base and increase it
by maintaining customer loyalty and ensuring maximum customer satisfaction. The goal of
profit maximisation comes after customer satisfaction in this kind of technique. This
technique is also known with the name PDCA cycle. PDCA refers to Plan, Do, Check and
Act (Zhuang, & Chang, 2017).
In the planning phase, the employees and management identify the customer needs and the
problems faced by them and try to develop a sustainable but flexible plan to overcome the
issues and provide high-quality services. After the planning is done, the actual
implementation of the plan is done in doing phase. The resources are utilised, and output is
given. In the checking step, monitoring is done to find the deficit in the output provision from
the desired level. In the final phase, the employees note down their actions and results,
perform for the deficiencies and boost themselves for the future course of actions (Mouseli, et
al. 2017).
Conclusion
After analysing all the details of the ABC model and alternative methods which could
be used, it could be inferred that the role of Activity Based Costing model is to improve the
management accounting of the costing of the business. However, there are several other
options which could be undertaken by Corp Travel Company to increase the recording and
accounting of its cost and expenses. The Corp travel company could also use TOTAL
QUALITY MANAGEMENT technique as cost accounting method as it i is the most
appropriate management accounting tool that can be followed.

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