Managerial Accounting Report: ABC System and Integral Diagnostics

This report provides a comprehensive analysis of the activity-based costing (ABC) system, focusing on its characteristics, implementation, and benefits within the context of Integral Diagnostics Limited, an ASX-listed healthcare service provider. The report examines how the ABC system aligns with the company's goals and strategies, particularly in enhancing its management accounting approach. It highlights the advantages of ABC in identifying cost drivers and allocating costs more accurately than traditional methods, especially within the healthcare sector where direct costs are often categorized as overhead expenses. The report explores how Integral Diagnostics Limited can leverage the ABC system to optimize its cost structure, improve service pricing, and enhance brand awareness. Furthermore, the report recommends the implementation of budgetary control as an alternative management accounting technique to increase the overall cost efficiency of Integral Diagnostics Limited. The report also emphasizes the importance of top management support and a cross-functional team for successful ABC system implementation. The analysis includes a discussion of the company's mission, corporate strategies, and the specific activities where the ABC model can provide valuable insights for better financial management.

Running head: MANAGERIAL ACCOUNTING
Managerial Accounting
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

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Executive Summary:
In this report, evaluation is made regarding the various aspects related to activity-
based costing (ABC) system comprising of its characteristics, enforcement and others from
the company perspective. For satisfying the report criteria, ABC system is associated with
Integral Diagnostics Limited listed in ASX, since it is highly valuable for enhancing
management accounting approach of the higher management of the organisation. In case of
Integral Diagnostics Limited, ABC model could play a significant role by detecting those
particular business activities, which need special attention and evaluation. Depending on
this analysis, it would be helpful for the stated organisation to allocate costs to the activities
that are rendered mostly to the customers. Finally, budgetary control could be used in the
form of alternative management accounting technique so that the overall cost efficiency of
Integral Diagnostics Limited is increased.

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Table of Contents
Introduction:..............................................................................................................................3
Answer to Part a:........................................................................................................................3
Answer to Part b:.......................................................................................................................5
Requirement i:........................................................................................................................5
Requirement ii:.......................................................................................................................6
Requirement iii:......................................................................................................................6
Answer to Part c:........................................................................................................................8
Answer to Part d:.......................................................................................................................9
Conclusion:...............................................................................................................................10
References:...............................................................................................................................12

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Introduction:
This report intends to evaluate the various aspects related to activity-based costing
(ABC) system comprising of its characteristics, enforcement and others from the company
perspective. For satisfying the report criteria, ABC system is associated with Integral
Diagnostics Limited listed in ASX, since it is highly valuable for enhancing management
accounting approach of the higher management of the organisation. It is a healthcare
service provider of diagnostic imaging services, medical specialists, general practitioners
along with allied health professionals and patients in Australia (Integraldiagnostics.com.au
2018). Effort has been made in aligning the ABC system with the goals and strategies if the
organisation for enhancing its management accounting system. Finally, effective
recommendations have been provided to enforce the system within the organisation along
with identifying another suitable management accounting tool based on the departmental
needs.
Answer to Part a:
One of the significant costing methods is the ABC system and it involves identifying
the activities conducted during the business operations based on which the products are
assigned with indirect costs (Al-Sayed and Dugdale 2016). Moreover, emphasis is placed on
the association among costs, products and activities for apportioning the indirect costs to
products with less subjectivity as opposed to the conventional costing system. However, the
managers find it complicated in apportioning few particular costs through the ABC system
and these include indirect expenses like office staff salaries and this cost could not be
apportioned easily to the manufactured product. As a result of this, popularity of the ABC

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system has increased widely in different industries, especially, the manufacturing sector.
Moreover, it is possible to use ABC system in product costing, target costing, service pricing
and other aspects (Barros and Ferreira 2017).
Based on the above discussion, it could be identified that certain special
characteristics are inherent in the ABC system, which are enumerated briefly as follows:
 Costs are separated into variable costs and fixed costs under the ABC system and
such separation enables the corporate entities in forming suitable costing systems,
as they obtain necessary information about costs (Botha and Du Toit 2017).
 The cost behaviour patterns could be distinguished, if the organisations apply the
ABC system.
 The cost behaviour pattern is tied directly to the diversity, volume, event and time
pertaining to costing system.
 The need of this system is to recognise the cost drivers; as such recognition would
help in tracing overhead expenses to the products (Chow 2016).
 The ABC system makes the cost accountants well-versed in stating the cost
behaviour patterns, as the cost drivers come into effect.

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Figure 1: Activity-based costing system
(Source: Huang
et al. 2014)
Answer to Part b:
It is evident that with the help of the ABC system, significant assistance is provided
to the organisations for aligning their current goals and strategies with the costing
technique. For ensuring such alignment, the primary need is their identification and they are
summarised as follows:
Requirement i:
It is noteworthy to mention that Integral Diagnostics Limited has a particular mission
statement driving the business organisation towards the accomplishment of particular
objectives and strategies. According to the mission statement of the organisation, it aims to
provide inclusive radiology services through referrals from allied health specialists and
doctors. For ensuring the success of such services, it uses certain platforms like innovative
systems, infrastructure and procedures for delivering sector leading patient care, business
efficacies and clinical outcomes (Integraldiagnostics.com.au 2018). Thus, it is evident from
its mission statement that the organisation focuses on fulfilling the customer needs by
providing superior quality services at reasonable prices. Moreover, profit is significant for an
organisation for maintaining sustainability in this era of cutthroat competition (Järvinen and
Väätäjä 2018). Emphasis is placed to improve the working ambience continuously so as to
raise the morale and confidence of the staffs, since this would lead to improved
performance. As a result, the ultimate business goals could be accomplished.

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Requirement ii:
Integral Diagnostics Limited has developed its corporate strategies in such a manner
that its business objectives are achieved and these strategies are summarised briefly as
follows:
 The primary corporate strategy of the organisation is to offer quality services to all
the rural patients in Australia as well as the other urban individuals so that profit
level could be increased while devising out suitable ways to reduce the business
cost.
 The next strategy is to expand further in the rural areas for providing support to the
rural communities that would help in developing positive brand image of the
organisation.
 Thirdly, Integral Diagnostics Limited aims to initiate new centres all over the nation
by adopting cost-efficient techniques so as to increase its profit margin.
 Fourthly, it takes necessary steps for assuring that the newly opened centres
encounter positive future growth that would assist in increasing its earnings.
 Finally, it focuses on valuing evidence-based medicines for the best possible
outcomes of the patients.
Requirement iii:
ABC model is widely utilised in the manufacturing industry; however, it has certain
characteristics that could not be overlooked in the healthcare sector as well. It is identified
that the healthcare service providers do not bear any direct cost; instead, the costs incurred
are categorised as overhead expenses. By adopting the ABC system, it is possible for Integral

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Diagnostics Limited to enjoy certain benefits that would fulfil its business strategies and
objectives (Lu, Sridharan and Michael 2016).
ABC system has activity, resources and cost objective sections. For Integral
Diagnostics Limited, the resource section includes the costs of its various departments.
Certain segments are there in these departments, which include the following:
 Corporate office
 Call centres
 Selling channels such as direct selling agents and online portals
 Shared service departments such as information technology and human resources
For calculating cost, it is important to explain the shared services (Mumford
et al.
2015). The departmental service volumes are taken into consideration so that costs could be
passed over to the other departments. Besides, there are different branches of the
organisation, in which grouping could be conducted depending on costs. Therefore, it could
be stated that the ABC system increases the cost assignment scope for all branches and as a
result, advertising costs could be anticipated appropriately (Orwig
et al. 2015).
The cost objectives are those, which could be explained depending on the business
transactions and operations that Integral Diagnostics Limited carry out for selling various
types of services. Hence, from the perspective of the organisation, these activities might be
the purchase of wholesale equipment, order receipt, services rendered to the customers,
after service support and others (Parker 2016). After explaining these transactions,
separation is to be made into activities in the ABC system. After this, the activities would be
named and timed and they would be put against each of them. In this case, batch size is

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significant for performing activities in batch mode. Thus, the departmental needs are taken
into account to group activities in the ABC system. It would help Integral Diagnostics Limited
in minimising the additional cost pressure from the patients and the new technology could
be implemented as well (Patrick, Blessing and Gloria 2015).
It is possible to distinguish cost objective into two sections. The first section includes
calculating the additional cost to be borne by the patients for different services and the
channels of distribution would be different as well. This could be the sale of radiology
services and diagnostic imaging services. It is evaluated that the patients would have to bear
the same additional cost for both services (Phan, Baird and Blair 2014). However, the costs
should not be calculated in combination, as radiology services are provided more as
opposed to diagnostic imaging services. If it adopts the ABC system, it could identify the
service that is rendered more between the two services. Thus, brand awareness could be
developed for the organisation that would ensure both business sustainability and
competitive advantage.
Answer to Part c:
The top level management of Integral Diagnostics Limited should extend support, if
ABC system is to be implemented within the organisation. Once the approval is sought, it is
the duty of the cross-functional team to develop as well as implement the model rather
than the accounting department. In this case, a special team needs to be developed by
unifying members from each department to use data derived from the ABC system.
Moreover, external specialists could be appointed, as their advice would ensure successful
enforcement of the ABC system (Quinn, Elafi and Mulgrew 2017).

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Certain reasons are evident to steer the top management of Integral Diagnostics
Limited in supporting the system. Primarily, the managers and the subordinates might not
show adequate interest to accept the change, if the top management does not show
adequate interest regarding the implementation of the ABC model. Secondly, the
importance of this system would not be much in the eyes of the employees, if there is lack
of support from the management of the organisation. For ensuring successful adoption of
this system, the management of Integral Diagnostics Limited should develop an in-depth
knowledge about the current costing technique inherent within the organisation. In order to
allocate costs suitably, the role of the cross-functional team is worth mentioning, as much of
the success of implementation relies on the team (Rodríguez-Olalla and Avilés-Palacios
2017).
Answer to Part d:
As already evaluated, ABC model would fetch immense benefits to Integral
Diagnostics Limited, if it is implemented successfully within the organisation. However,
certain other management accounting tools are available, which could meet the interests of
the organisation. Out of such tools, budgetary control could be taken into account for the
organisation. This is because budgets are highly advantageous to conduct planning and
controlling the business processes. Along with this, the managers of Integral Diagnostics
Limited would have the option of utilising the budgets for planning, controlling as well as
monitoring various kinds of activities that take place in the normal business cycle (Rooney
and Dumay 2016). Benefits are deemed to be obtained when budgetary control would be
introduced in Integral Diagnostics Limited and these benefits are undernoted:

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 When budgetary control is enforced, it makes easy for the management of Integral
Diagnostics Limited in integrating the actions of the staffs towards the fulfilment of a
sole and common objective. Moreover, budgetary control ensures synchronisation
that would help in meeting the set standards and targets at the start of the financial
year.
 The budgetary control techniques enable to undertake corrective actions, if the
amount estimated for a particular department at the start of the period is more than
the one incurred at the end of the period.
 With the help of budgetary control, it would become relatively easy for the
management of Integral Diagnostics Limited to know about the previous events, in
which errors were made. The information accumulated should be evaluated
accordingly and steps could be taken for assuring that such errors do not happen in
future or at least their chances would be reduced. Hence, budgetary control sets out
the platform where suitable strategies could be framed to deal with the unexpected
contingencies as well as rectifying past errors.
Conclusion:
It is evident from the above discussion and evaluation that base for separating costs
into fixed costs and variable costs could be developed with the help of the ABC system. Such
separation would allow the business entities to formulate as well as enforced the needed
costing services. In case of Integral Diagnostics Limited, ABC model could play a significant
role by detecting those particular business activities, which need special attention and
evaluation. Depending on this analysis, it would be helpful for the stated organisation to
allocate costs to the activities that are rendered mostly to the customers. Finally, budgetary

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control could be used in the form of alternative management accounting technique so that
the overall cost efficiency of Integral Diagnostics Limited is increased. This is because such
cost efficiency would minimise the burden of additional cost from the patients and the
organisation could provide services to the patients at prices, which are reasonable and
within the reach of the patients.

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References:
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model in a Portuguese production environment.
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[online] Available at: https://www.integraldiagnostics.com.au/ [Accessed 18 May 2018].
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Based Costing. Three Interventionist Case Studies.

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Lu, C., Sridharan, V.G. and Michael, S.C., 2016. Implementation of the activity-based costing
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