Costing Techniques and ABC Implementation: Belle Clinique Report

This report evaluates the costing techniques and provides recommendations to the board of directors of Belle Clinique on the implementation and adoption of activity-based costing (ABC). The report analyzes the current costing system, which allocates overhead costs based on machine hours, and identifies that the system is contributing to increasing total overhead costs, particularly affecting the pricing and sales of the product IPL. The report compares the unit costs of products under traditional and ABC systems and recommends implementing ABC to address pricing issues and improve the profitability of IPL. It discusses arguments for and against ABC implementation, and provides an executive summary, introduction, discussion of ABC development, analysis of pricing pressures, comparison of costing methods, options for improving profitability, and a conclusion recommending the adoption of ABC to improve the company's financial performance. The report also includes references and an appendix with cost calculations.

Running head: ADVANCED MANAGEMENT ACCOUNTING
Advanced management accounting
Name of the Student
Name of the University
Author Note

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Executive summary:
The report is prepared to demonstrate the importance of activity based costing technique to
the costing strategy of Belle Clinique. The information from the case study identifies that the
current costing system is not suitable as it is contributing to increasing the total overhead
costs. Facing the competitive pressure in terms of pricing the product, it has been found that
product IPL is not adequately priced as the sales of the product is falling continuously. The
reason is attributable to the rising overhead costs that has resulted in marking the price of the
product at certain percent of the mark up price. From the overall analysis of the facts of the
case, it has been ascertained that the adoption of activity based costing would assist Belle
Clinique in addressing the issue of pricing and increasing the sale of one of its product. It is
therefore recommended to implement the activity based costing system.

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Table of Contents
Executive summary:...................................................................................................................1
Introduction:...............................................................................................................................2
Discussion:.................................................................................................................................2
Development and history of ABC system:.................................................................................2
Identifying the price pressure and contribution of the current costing system:.........................3
Comparing the unit cost of the two products under traditional volume based costing and
proposed ABC system:...............................................................................................................3
Five options for improving the profitability of the products:....................................................3
Identifying five arguments supporting the implementation of ABC and five options against
the adoption of ABC:.................................................................................................................4
Recommendation and conclusion:.............................................................................................6

ADVANCED MANAGEMENT ACCOUNTING
Introduction:
The report is prepared for evaluating the costing techniques and make a
recommendations to the board of directors of Belle Clinique on the implementation and
adoption of activity based costing technique. The budgeted manufacturing overhead costs for
year 2020 is proposed to be analysed using the activity based costing. It has been found that
the company is facing the price pressure for one of its product that is ILP. On other hand,
increased sales is reported for its product HRL as the price of the product is very competitive.
Total manufacturing overhead is recorded at $ 8645000 and the budgeted machine hours is
910000 hours. The reason attributable to the significant production overhead is because of the
specialized equipment and significant automation. The overhead of production is allocated to
the products based on machine hours in the current costing system. Pricing of all the products
are don at cost and including the allocated production overhead.
Discussion:
Development and history of ABC system:
The inadequacy of the cost accounting resulted in the introduction of the activity
based costing technique and the objective of introducing such costing was to overcome the
difficulties of dividing the production into core activities. Increasing complexities of the
business resulted in devising a system that resulted in the allocation of cost that resulted in
assigning the cost accurately. One of the well-known system of management accounting in
the last twenty years is activity based costing. Allocation of costs is done in a better way and
the basis of assigning the cost are the different cost drivers (Almeida & Cunha, 2017). In the
mid 80’s, the method of activity based costing was perceived so that the misleading
allocation of overhead is corrected. It is admitted by many scholars and practitioners that
there are various pitfalls of activity based costing. It is also explained that the implementation

ADVANCED MANAGEMENT ACCOUNTING
of the costing system is expensive and particularly in the service industries, many failures
have been observed.
Identifying the price pressure and contribution of the current costing system:
IPL is the most popular product of the company and the pricing pressure is
experienced by the company in terms of higher price of this particular product compared to
its competitors. This in turn has resulted in falling sales of IPL. However, the specialized
product of the company such as HRL is competitive in the smaller market and increased sales
is being reported. In the current process of production, there is a requirement of specialized
equipment and significant automation and this has resulted in significantly increasing the
production overhead. The production overhead under the current system of costing is
allocated to the products based on machine hours (Chiwamit et al., 2017). This has resulted in
increasing the total overhead cost of the products as it can be observed that the machine hours
required to produce the product such as ILP is just double that machine hours required by the
product HRL.
Comparing the unit cost of the two products under traditional volume based costing
and proposed ABC system:
ILP(per unit
cost)
HRL (per unit
cost)
Traditional costing system 305 444.5
ABC system 285.65 523.75
From the above table, it is evident that for product HRL, the cost per unit is higher
under ABC system compared to traditional costing system. On other hand, ILP can be
produced at lower cost under ABC system implying that adoption of such system would
lower per unit cost of ILP compared to HRL. However, it is noteworthy to mention that the

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total cost of the products under the traditional method is lower than ABC system.
Nevertheless, in order to make ILP competitive, it is recommended to adopt ABC.
Five options for improving the profitability of the products:
 The pricing of the products should be done accurately so that the competitive pricing
is offered by the company and thereby helps in return maximization.
 Profitability of the products can be improved by decreasing the total overhead costs. It
can be observed from the given case that the company is incurring a significant
overhead cost and this is perhaps attributable to higher machine hours for one of its
product. It is therefore required by the company to take measures to save the energy
by making running of the machinery for less hours.
 It is also observed from the given case of Bell Clinique that the sale of one of its
product that is IPL has reduced and this has been due to the competitive pressure as
the competitors are selling the products at lower price. It is important for the company
to revise the selling price of the product and mark the price of the product
competitively so that the sales can be increased (Chiwamit et al., 2017).
 Any increase in price should be selected along the product lines to some selected
market. It is important for the company to account for the change in pricing of the
product and price should only be increased until the demand for the same level offs.
Price should be set back if there is a fall in the cash generated due to fall in demand.
 Some of the strategies of competitive pricing should be adopted so that the company
and its product stand above the competition. These strategies includes marking the
product pricing using the strategy of pricing below competition or pricing above
competition. In the case of pricing above competition, it is important for the company

ADVANCED MANAGEMENT ACCOUNTING
to justify such higher price in terms of exclusivity, location and unique service to
customers (Namazi, 2016).
Identifying five arguments supporting the implementation of ABC and five options
against the adoption of ABC:
Five arguments supporting the implementation of ABC are as follows:
 Customer activities can be effectively identified using such costing system and the
costs particularly allocated to certain customers are tracked using activity based
costing.
 Costs of the product are determined reliably and accurately as the main focus of the
costing system is on cause and effect. This is because it is recognized by the costing
system that the activities are consumed by the product and costs is increased due to
the products. In the event of greater diversity amongst the manufactured products,
correct and reliable data on the product cost is provided by ABC system (Otley,
2016).
 Since the main issue of the company is increasing overhead cost, it is considered
suitable to adopt the ABC system as the real and true nature of the costs can be
identified. The activities causing the overhead fixed cost can be easily tracked and can
be brought down to the profitable level (Allain & Laurin, 2018).
 Activities cost is traced to the processes, managerial responsibility, departments and
customers beside the cost of the products.
 Information on the volume of transaction and rates of cost drivers is provided by ABC
and the drivers can be used by the company in advantageous manner for the product
designing.

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 A range of application can be resulted from the cost driver identification and activity
cost pooling. This would cause the cost reduction to foster and spare capacity
identification (Hopper & Bui, 2016).
Four arguments against the adoption of ABC system:
 Numerous cost driver and cost pools makes the activity based costing system
complex.
 For the implementation of the costing system, some measurement are required to have
in place for the allocation of costs.
 Implementation of costing system is difficult due to assignment of common cost, cost
driver selection and varying rates of cost driver. Management is required to estimate
the cost for measuring and identifying the cost drivers so that the base of allocations
can be served (Marinho et al., 2018).
 Application of activity based costing is not suitable when the overhead cost is
relatively low and it can be observed from the case of Belle Clinique that they have
significant overhead for one of the products. This costing system make use of
information technology as the allocation of cost requires to collect a lot of costing
data and for the information analysis. It is likely to increase the overhead cost of the
products sold.
Recommendation and conclusion:
From the analysis of the case of Belle Clinique, it is observed that the current system
of costing the products is not profitable for the product ILP as it is increasing the total
overhead cost. Adoption of activity based costing system would help in addressing the
ongoing issue of costing and pricing of the product for generating profits. It is therefore
recommended to implement and adopt activity based costing technique.

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References list:
Abdel-Maksoud, A., Cheffi, W., & Ghoudi, K. (2016). The mediating effect of shop-floor
involvement on relations between advanced management accounting practices and
operational non-financial performance indicators. The British Accounting
Review, 48(2), 169-184.
Allain, E., & Laurin, C. (2018). Explaining implementation difficulties associated with
activity-based costing through system uses. Journal of Applied Accounting Research.
Almeida, A., & Cunha, J. (2017). The implementation of an Activity-Based Costing (ABC)
system in a manufacturing company. Procedia manufacturing, 13, 932-939.
Chiwamit, P., Modell, S., & Scapens, R. W. (2017). Regulation and adaptation of
management accounting innovations: The case of economic value added in Thai state-
owned enterprises. Management Accounting Research, 37, 30-48.
Hoozée, S., & Hansen, S. C. (2018). A comparison of activity-based costing and time-driven
activity-based costing. Journal of Management Accounting Research, 30(1), 143-167.
Hopper, T., & Bui, B. (2016). Has management accounting research been
critical?. Management Accounting Research, 31, 10-30.

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Marinho Neto, H. F., Agostinho, F., Almeida, C. M., Moreno García, R. R., & Giannetti, B.
F. (2018). Activity-based costing using multicriteria drivers: an accounting proposal
to boost companies toward sustainability. Frontiers in Energy Research, 6, 36.
Namazi, M. (2016). Time Driven Activity Based Costing: Theory, Applications and
Limitations. Iranian Journal of Management Studies, 9(3), 457-482.
Otley, D. (2016). The contingency theory of management accounting and control: 1980–
2014. Management accounting research, 31, 45-62.
Appendix:
Estimated Unit Cost of both products under the traditional costing system
Particulars` ILP HRL
Direct Materials 180 390
Direct Labor 30 45
Manufacturing Overheads (allocated on the basis of budgeted machine hours)
712500
0 332500
Manufacturing overhead per unit 95 9.5
Total cost per unit 305 444.5
Workings:
Machine hour per unit 10 5
Total Units manufactured 75000 7000
Total Machine Hours 750000 35000
Workings
HRL
Total sales 7000
Batch size 20
Number of batches 350

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Estimated Unit Cost of both products under the ABC system
Particulars` ILP HRL
Direct Materials 180 390
Direct Labour 30 45
Direct Overheads:
Purchasing Costs 180000 42000
Materials Handling 300000 84000
Engineering 568750 159250
Production 3750000 175000
Assembly 600000 84000
Quality Control 275000 77000
Total Manufacturing overheads 5673750 621250
Cost per unit 75.65 88.75
Total Cost per unit 285.65 523.75