BMP5006 Financial Management & Decision Making: Cadbury ABC Analysis

This presentation provides a detailed analysis of Activity Based Costing (ABC) within the Cadbury organization. It begins by defining ABC and comparing it with traditional costing systems, highlighting the differences in allocating direct and indirect expenses. The presentation then delves into the specifics of ABC implementation at Cadbury, covering resources, resource drivers, activities, activity drivers, activity cost drivers, and cost objects. It further discusses the advantages and disadvantages of using ABC, contrasting it with traditional costing techniques and explaining why ABC might be preferred due to its accuracy in providing a detailed breakdown of secondary charges. The presentation concludes by emphasizing ABC's role in effective cost splitting and identifying unnecessary operations, ultimately leading to potential cost savings and enhanced profitability. The document is contributed by a student to be published on the website Desklib, a platform providing AI-based study tools for students.

BMP5006 Financial Management & Decision
Making
Assessment 1 - Presentation

Activity Based Costing Of
Cadbury Organisation
Name: xxxxxxx
ID: xxxxxxx

Content
• Definition of Activity Based Costing
• Comparison with other costing systems
• Activity Based Costing of Cadbury organisation
Resources
Resource Drivers
Activities
Activity Drivers
Activity Cost Drivers
Cost Objects

Content
• Advantages of the business using ABC
• Disadvantages of the business using ABC
• Traditional Costing Techniques
• Why Activity Based Costing (ABC) might be recognised as beneficial in
preference to Traditional Costing Techniques

Definition of Activity Based Costing (ABC)
• Activity Based Costing (ABC) is an internationally known technique for producing staff durations and
prices through disintegrating every operation into its basic elements to calculate the labor effort
necessary.
• This allows staff wages to be assigned to all operations inside an enterprise and offers an estimation of
the amount of resources needed to complete a particular aspect of work.
• This gives important data to any scheduling, measuring, and motion control, allowing executives to make
more accurate and well-informed business strategies.

Comparison with other costing systems
• Activity-based costing is a straightforward way of allocating expenses both direct and indirect
to specific product components. Activity-based costing is a more complex method in which
expenses are assigned to activity centers instead of the goods generated by such operations.
• ABC is more complex and exact than conventional pricing, which frequently divides
operating expenses among product depends on a yearly amount that has been specified.
Standard costing is less exact and less complex than ABC costing.
• Traditional costing can only be utilized to absorb manufacturing overhead cost, but activity-
based costing can be used to properly allocate both manufacturer and non-manufacturing
overhead expenses such as sales, management, and so forth.

Activity Based Costing of Cadbury organisation - Resources
• Activity-based costing is a costing and management approach that entails analyzing usage of
resources and pricing final products. Activities are allotted materials, and actions are allocated cost
items. The other employ cost drivers to associate costs to activities with outcomes in Cadbury.
• Activities are allocated resources, which are afterward allocated to price items based on their
activity. Activity-based costing acknowledges the causal links between cost drivers and
occupations.

Activity Based Costing of Cadbury organisation – Resource Drivers
• ABC focuses on cost drivers, or behaviors that raise costs. While activity-based costing includes
transaction-based factors like the number of transactions handled, traditional absorption costing
concentrates on output factors such hours worked. Long-term variable expenses that were originally
believed of as fixed costs can consequently be assigned to commodities.
• Cost drivers are the actual behaviors that raise a cost objects pool's total price. Operations that affect a
company's expenditures include ordering supplies frequently, having a lot of production departments at
a facility, and sending out a lot of shipments to customers..

Activity Based Costing of Cadbury
organisation – Activities
•Each time a services or a commodity is provided, unit level actions take place. Unit level
operations include the expenses of units produced, direct labour, and maintenance of
equipment.
•The costs incurred whenever a grouping (batch) of items is made or a series of tasks is
finished are known as packet level operations. Batch level tasks include authorizations,
machine installation, and proper testing.

Activity Based Costing of Cadbury
organisation – Activity Drivers
• An activity driver analysis is a process used in activity-based pricing to discover and examine the factors
influencing the pricing of goods and services. Such deliver digital the relationship between costs,
administrative costs, and heavy manufacturing. Throughout this connection, this produces extra expenses.
The ADA accounts for all of the various cost factors. In the end, it provides the management with a
mechanism to decide if certain behaviors are more costly as well as whether specific factors are easier to
monitor. The research examines the links between behaviors and the factors that impact their prices..

Activity Based Costing of Cadbury
organisation – Activity Cost Drivers
• An activity - based cost driver is a group of actions that influence the rising or falling expenses
experienced by a business. Therefore, by correctly understanding the specific operations that are
producing the expenditures, this could help the company become more profitable to identify which
item or service is responsible for certain expenditures. Thus a system understands the relationship
between costs, administrative costs, and heavy manufacturing. Through such a contact, it causes
indirect costs.

Activity Based Costing of Cadbury
organisation – Cost Objects
• The ABC cost accounting system relies on actions, which are any occasions, periods of labour, or
endeavours with a specific goal, like as setting up production machinery, producing things,
distributing finished products, or operating machinery. Activities are cost objects because they use
specifically highlights. Product offerings, geographic areas, clients, departments, and everything else
for which administration want to quantify cost are typical examples of cost objects. A cost object is
anything that requires a different cost measurement. A cost item might be a commodity, a company, a
project, or something else.

Advantages of the business using ABC
• For the exact measurement of ABC, this can assist management in making more effective
decisions. As a result, a better choice may effectively enhance management approach and
operational thinking, focus of this section in unpredictability, and allows companies to discover
mistakes.
• To maintain a competitive advantage, the organisation must provide high-quality goods and
services at a reasonable price. As a result, the corporation is interested in the pricing that rivals
set for their goods.

Disadvantages of the business using ABC
• 1. Costly and Complicated: Because ABC includes various allocation bases and cost drivers,
it might be more complex than typical product cost information. Managing the ABC system
may be costly.
• 2. Driver Selection: Several issues arise during the operation of the ABC system, like the
short listing of costing system, the allocation of costs and expenses, fluctuating cost driver
rates, and so on.

Traditional Costing Techniques
• Costing methods are used for items that go through many procedures. The production of fabric
involves several steps, including spinners, spinning, and the final result. Every operation produces
an output that may be marketed as a finished products in and of itself. Cost management is
therefore used to determine the price of each beginning of the project.
• Cost per job order: This approach determines expenses for every service call independently
because they each have their own specifications and scope. This kind of pricing also applies to
custom-made goods.

Why Activity Based Costing (ABC) might be recognised as beneficial in preference to Traditional Costing Techniques
• Activity-based cost data is more accurate than conventional costing methods. This appears to be
because they provide a more detailed breakdown of secondary charges. ABC systems, in comparison
extreme, need more work and cost more money to implement. It is difficult to switch from holds regular
to activity pricing. Process models are more challenging to implement and complex than conventional
costing methods. In contrast side, the accuracy of traditional costing methods is inferior to that of the
costing system. Traditional costing techniques may result in significant under- or overestimations.

Summary
• Activity-based costing (ABC) is a specialized approach for assigning prices to individual
activities, providing for a more effective cost split and detecting unnecessary operations.
Its comprehensive application will result in possible cost savings and can assist enhance
the amount of profit generated.
• The primary cost item in ABC systems is activities. However, the approach is adaptable
enough even to assign costs to consumers, processor, and management responsibilities
rather than simply goods.

Any Questions?

References
• Bailey, W. J. and Samuels, J. A., 2018. Analyzing Two Investments—An Instructional
Case to Introduce Basic Financial Accounting Concepts. Issues in Accounting
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• Bratton, A., 2018. Cash oriented budget accounting (Doctoral dissertation, Тернопіль:
ТНЕУ).
• Huebner, J., Fleisch, E. and Ilic, A., 2020. Assisting mental accounting using
smartphones: Increasing the salience of credit card transactions helps consumer reduce
their spending. Computers in Human Behavior. 113. p.106504.
• Kusmiati, E., Ungkari, M. D. and Basit, A. A., 2020, May. Planning, Implementation, and
Control of Management Accounting in the Public Sector. In 2nd International Seminar on
Business, Economics, Social Science and Technology (ISBEST 2019) (pp. 208-213).
Atlantis Press.

Thank you