Management Accounting Report: Applying ABC Model to Wesfarmers

This report provides an executive summary of management accounting tools, emphasizing the importance of Activity-Based Costing (ABC) in business operations. The report selects Wesfarmers Limited to demonstrate how ABC can support its strategies. It details the features of ABC, provides a background of Wesfarmers, including its mission, objectives, and corporate strategies, such as its marketing mix (product, price, place, and promotion). The report explains how ABC assists Wesfarmers in achieving these strategies through cost recognition, secondary and primary cost pool loading, activity driver evaluation, cost assignment, report formulation, and data analysis. Recommendations for ABC implementation and an alternative management accounting tool, flowchart analysis, are also suggested. The report concludes by highlighting the significance of ABC in enhancing efficiency and cost management within the company.

Management Accounting
Wesfarmers Limited
5/15/2018

MANAGEMENT ACCOUNTING 1
Executive Summary
This report is about the management accounting tool, their importance, and assistance in the
functioning of the business organization. In order to continue this Wesfarmers Company has
been selected to provide the explanation of how Activity-based costing will assist it in
attaining strategies.

MANAGEMENT ACCOUNTING 2
Table of Contents
Executive Summary...................................................................................................................1
Introduction................................................................................................................................3
Activity Based Costing..........................................................................................................3
Features of Activity Based Costing....................................................................................5
Background of Wesfarmers....................................................................................................5
Mission of Wesfarmers..........................................................................................................6
Objectives of Wesfarmers......................................................................................................6
Corporate Strategies of Wesfarmers......................................................................................6
Marketing Mix...................................................................................................................6
How ABC will assist Wesfarmers in Achieving Strategies...................................................7
Recognize Costs.................................................................................................................8
Load secondary pools of cost.............................................................................................8
Load primary pools of cost................................................................................................8
Evaluate activity drivers.....................................................................................................8
Assign costs in secondary pools to primary pools.............................................................8
Charging cost to the cost objects........................................................................................8
Formulate Report...............................................................................................................8
Act on the data or information...........................................................................................8
Recommendations for Implementing ABC Model................................................................9
The suggestion of Management Accounting Tool.................................................................9
Conclusion..................................................................................................................................9
References................................................................................................................................11

MANAGEMENT ACCOUNTING 3
Introduction
Accounting is the procedure of recording, cataloging, and writing of transactions and events
of the business organization (Accounting tools, 2018). It is responsible for offering feedback
to the administration of the company about its financial status and results. Same as
accounting management accounting is also very beneficial and important for every
organization as it the procedure of examining, understanding and presenting information of
accounting gathered with the support of cost accounting and financial accounting to support
management in the decision-making process, forming policy and daily action of an
organization (Adler, 2013). This report will elaborate the use and importance of management
accounting tool i.e. Activity-based costing which will be applied in Wesfarmers Company to
know how it will support in attaining company's strategies. Before this, an overview of the
company will be provided along with its mission and objectives. In the recommendations of
the implementation of ABC Model will be provided and suggestion of one more management
accounting tool will be given which can also be applied in Wesfarmers.
Activity Based Costing
Source [(ScaleX, 2018)]

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Activity-based costing or ABC model is a method of managerial accounting that traces the
cost of overhead to activities and then allocates them to objects. Moreover, it is a method to
assign the cost of indirect overhead to departments or products that create these costs in the
process of production (Accounting tools, 2017).
Activity Based Costing concentrates on recognizing activities, or processes of production,
that are utilized to operate a task or job. These single activities are pooled together will
related procedures into a pool of cost that linked to a single activity driver of cost. The pools
of cost are then recognized and allocated to a predetermined rate of overhead that will
ultimately be allocated to individual products and jobs (Wilkinson, 2013). It is known that
ABC Model is a complex procedure; on the other hand, it is an accurate method of allocating
indirect costs (Accounting Explanation, 2011). In an organization, Activity-based costing
practice allocates the resources cost by activities to the services and products offered to its
consumers. ABC is normally utilized as a tool for understanding customer and product cost
and profitability depending on the process of production. As such, this method or model is
mainly used to help strategic decisions like outsourcing, measurement, pricing, and
identification of process enhancement initiatives (Kannaiah, 2015).
ABC Model is normally utilized in the manufacturing industry. The reason behind its
usefulness in the industry is that by assigning the indirect cost to the products depending on
their usage, a business can easily and precisely see where the energy and resources are being
utilized in a company. By identifying where the energy and money are going, efforts can be
considered on those products that are consuming the maximum energy and time (Kim, 2017).
This will ultimately result in dropping the cost, as efforts will be given to decrease the bulk
product costs. ABC Model is about the competence or efficiency. Efficiency is dominant to
achievement and development in a business and therefore, activity-based costing is an
operative method to assign an indirect cost to products (Araujo and Costa, 2018).

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Features of Activity Based Costing
 A well-organized system of ABC need information of various organization parts,
therefore, involving employees with detailed working experience and those who are
aware with the several parts of the operation of the organization is necessary.
 The suitable cost driver needs to be identified in order to trace the overhead to a
product.
 The total cost is divided into two kinds i.e. variable cost and fixed costs which is
required to deliver quality data to create a proper system of cost in the manufacturing
sector.
 The patter of cost behavior is dictated by the cost drivers
 The patterns of cost driver are time-related, diversity-related, volume related and
events related (Money Matters, 2018).
Background of Wesfarmers
Wesfarmers Limited is a well-known Public Company that is on the number 1 position from
the Australian top 2000 companies. The company earns most of its revenue and income from
the Grocery stores and supermarkets in the industry of Australia. Wesfarmers earned a
$68,732,000,000 overall revenue comprising other revenue and sales in 2017 (IBIS World,
2017). In the same year in Australia, it has approx. 223000 employees comprising employees
from all businesses under the control of the company. The Wesfarmers Limited is also known
as a conglomerate of Australia, with the headquarter in Western Australia with major
business in the New Zealand and Australia retail, coal mining, safety products, chemicals,
industrial and fertilizers sector. The company was introduced in the 1914 year as a co-
operative to offer merchandise and services to the farmers in Western Australia (Wesfarmers,
2015).

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Mission of Wesfarmers
The company of the company is concentrated towards performing best practices by
considering ethical concerns of the operations of the business. Wesfarmers is focusing
towards supplying satisfactory return level to its shareholders. The company wants to
enhance their reputation in the ethical practices. The mission is to have the huge ethical
standards in the company that is functioning in the industry of retail of New Zealand and
Australia (Examples of, 2018).
Objectives of Wesfarmers
 The objective of Wesfarmers is to create an appropriate culture in the organization.
An exclusive corporate structure needs to be created by the company.
 The company wants to offer high quality if products and services to its consumers. To
get success in the business operations, the company has to concentrate on the quality
of the product and delivery of information to the consumer. The consumer should
receive correct information in terms of products.
The company is focused towards offering the best working environment to its
employees; it ensures the health of the workplace and safety of its employees.
 The company’s objective is to operate for the society’s sustainable development and
the environment linked with the region in which it is operating the functions of the
business (Wesfarmers, 2018).
Corporate Strategies of Wesfarmers
Marketing Mix
The marketing mix means the set of tactics or actions that are used by a company to advertise
or promote its product in the market. The marketing mix is made up of 4ps i.e. Product, price,
place, and promotion (The Economic Times, 2018).

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Product – Wesfarmers deals in various segments such as coal mining, fertilizing, retail,
chemical, safety and industrial products. It offers a variety of options to the customers due to
its diversified business, however, majorly in the retail sector company focuses on offering
products in bulk due to the customer buying behavior in Australia. They do not like to visit
the market, again and again, therefore, they purchase products in bulk.
Price – The Company is said to be the cost leader especially in the retail sector. It provides
products at a low price to the customers similarly with high-quality products. The aim of the
company is to regularly decrease the cost.
Place – Wesfarmers has overall 2300+ outlets and spreads out to millions of consumers as a
part of its distribution strategy. However, the company is planning to open more outlets in the
future by adding more products in the product line.
Promotion – The advertising and marketing strategy of the company revolves around the low
price that it offers. In the retail sector, it makes use of “why pay more” as a tagline which
highlights the value that customer receives from it.
How ABC will assist Wesfarmers in Achieving Strategies
Activity Based Costing is a practice for more accurately assigning overhead to those objects
that are actually used. This system can be utilized for reducing the overhead costs.
Wesfarmers Limited is involved in different businesses by involving various activities and
departments; therefore, for the smooth functioning of the business company should use and
implement Activity-based costing. Various strategies of the company that are discussed
above i.e. product, price, place, and promotion can be performed effectively if this
management accounting tool will be implemented. In order to explain the assistance of
Activity-based costing for attaining company's strategy the implementation procedure needs
to be followed by Wesfarmers which is as follows:

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Recognize Costs – The initial step of the ABC model is to recognize those costs that are
required to be allocated. This is a very critical step in the complete procedure, as we do not
need to waste time (E-Library, 2018).
Load secondary pools of cost – At this step, cost pools are created for those costs that are
incurred to offer services to other various areas of the company, in place of directly
supporting the services and products of the company. The secondary cost pools normally
comprised of administrative salaries, similar costs, and computer services.
Load primary pools of cost – In this step, set of cost pools are created for those costs that
are closely associated with the services or goods production. It is necessary to possess
separate cost pools for every product line. These costs can include advertising, distribution,
development, and procurement.
Evaluate activity drivers – At this step, the company needs to utilize a system of data
collection to gather activity drivers' information that is utilized to assign the cost in secondary
pools of cost to primary pools of cost.
Assign costs in secondary pools to primary pools – In this step; activity drivers are utilized
to assign the costs in the secondary pools of cost to the primary pools of cost.
Charging cost to the cost objects – In this step, use of activity drivers is done to assign the
contents of every primary pool of cost to cost objects. There shall be a separate driver of
activity for every cost pool.
Formulate Report – The outcomes of ABC system are converted into reports such that it can
be used by the management of the company.
Act on the data or information – The most casual reaction of the administration to the
report of ABC is to decrease the activity drivers’ quality utilized by every cost objects.

MANAGEMENT ACCOUNTING 9
Recommendations for Implementing ABC Model
 In order to effectively implement Activity-based costing system in the Wesfarmers, it
needs to focus that there is strong support for the top management of the company.
This is being said because without their guidance and leadership the implementation
cannot be done properly.
 While implementing Activity-based costing in Wesfarmers it should ensure that they
have skilled and talented staff in the company who can maintain the system and
understand the information extracted by the implementation of the system.
 The attitude must be practical while implementing Activity-based costing system in
the company.
The suggestion of Management Accounting Tool
Management accounting provides a bundle of solutions for different problems that are faced
by the company in its lifecycle that should be adopted by the company to effectively function
in the market. Activity-based costing is one of the solutions which is discussed above that
will support company in reducing its overhead cost. However, besides activity-based costing,
there is another tool which can be used by Wesfarmers i.e. Flowchart analysis. A Flowchart is
said to be a graphic or pictorial depiction of the steps in a procedure where every step is
signified by a block. The evaluation of a flowchart permits the exclusion of steps which are
non-value added. When it is created by a group, the chart signifies an agreement. The
flowchart analysis is a valuable tool for defining how a process works (Geigle safety group,
2016)
Conclusion
In the conclusion, it can be said that Activity-based costing is an effective tool which will
assist Wesfarmers in attaining a leading position in the market and save cost. Moreover, it

MANAGEMENT ACCOUNTING 10
will allow the company to manage each activity with resources. The above report has
identified the features of this system. Along with this the mission and objective of
Wesfarmers that can be achieved with the guidance of Activity-based costing system. The
report has involved strategies of the company and how they will be achieved through ABC
Model. Further, recommendations for the implementation of ABC have been provided and
suggestion of another management accounting tool that can also be used by Wesfarmers to
manage activities, resources, and cost.

MANAGEMENT ACCOUNTING 11
References
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System [online]. Available from
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2018]
Adler, R. (2013) Management Accounting. 3rd edn. U.K: Routledge.
Araujo, J.A., and Costa, R.P. (2018) Activity-Based Information Integrating The Operations
Strategy [online]. Available from
https://www.pomsmeetings.org/confproceedings/001/papers/OPS-02.2.pdf [accessed 15 May
2018]
E-Library (2018) The Steps to Implement ABC [online]. Available from
https://ebrary.net/389/accounting/steps_implement_abc [accessed 15 May 2018]
Examples of (2018) Mission Statement of Wesfarmers [online]. Available from
http://www.examplesof.com/mission-statements/Wesfarmers.html [accessed 15 May 2018]
Geigle safety group (2016) Flowchart Analysis [online]. Available from
https://www.oshatrain.org/notes/2anotes12.html [accessed 15 May 2018]