HI5017: Activity Based Costing Model for Cochlear Company Limited

This report analyzes the potential benefits of Activity Based Costing (ABC) for Cochlear Company Limited, focusing on cost minimization and efficiency. It discusses how ABC can improve cost identification compared to traditional methods, standardize operations, and enhance computerization and accounting processes. The report highlights the limitations of traditional costing, such as inaccurate product costs and reduced revenue. It emphasizes the advantages of ABC, including direct labor cost tracing and efficient overhead allocation, ultimately leading to better resource utilization and profitability. The report concludes with recommendations for successful ABC implementation, emphasizing the importance of management support, staff training, and the potential adoption of a Total Quality Management model for maximizing profitability and customer value.

Activity Based Costing 1
ACTIVITY BASED COSTING
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Activity Based Costing 2
ACTIVITY BASED COSTING MODEL
Table of Contents
EXECUTIVE SUMMARY.....................................................................................................................3
Introduction.....................................................................................................................................4
ACTIVITY BASED COSTING AND ITS SALIENT FEATURES..................................................................4
How the ABC Model aligns with the organization's goals and strategies.......................................6
Mission and objectives of the organization.................................................................................6
Objectives of the Cochlear Limited..............................................................................................6
Corporate strategies adopted by Cochlear Company Limited....................................................7
How the Activity Based Costing model would help the company achieves its strategies..........8
Recommendations to Iron Mountain Incorporation on the adoption and implementation of the
ABC model.......................................................................................................................................9
The alternative accounting tool that Cochlear Company Limited can adopt...............................10
Conclusion......................................................................................................................................10
References.....................................................................................................................................12

Activity Based Costing 3
EXECUTIVE SUMMARY
The main purpose of this paper is to identify some of the benefits that Cochlear
Company limited might obtain through a consistent and effective adoption and application of
the Activity Based Costing (ABC) as it aims at minimizing costs and ensuring efficiency in its
processes and activities. Cochlear company limited can thus apply the use of the ABC model to
identify the costs related to its production activities that cannot be accurately captured and
reported through the adoption and application of the traditional costing systems. Through the
use of the ABC system, it can successfully bring in standardization in its operations and
processes since uniformity is not always a culture practiced in most of the practicing
organizations. The activity-based costing model thus will act as a catalyst to Cochlea’s
developments, through office computerization and accounting as well as the ERP
implementation. The adoption of the traditional enterprise accounting system, numerous tasks
involving non-computerized accounting was practiced, whereby bookkeeping dominated
extensively by outsourced reporting activities. Through the traditional costing methods,
inaccuracy of product costs also becomes inevitable, thereby hindering the company’s ability to
compete on pricing favorably. This also resulted in a reduction in the company’s revenue
streams.
Therefore, the critical roles that would prove to be beneficial to the organization,
through effectively and efficiently adopting and applying the ABC model, would be the ability to
directly trace direct labor costs to their products as well as being able to allocate production
overheads efficiently.

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The ABC model would thus help the organization to effectively and efficiently utilize the
available resources, though scarce, to adequately apportion job costs about their usability and
availability for producing a single product to each cost unit of the product.
Introduction
Despite the many challenges that come with the adoption and implementation of the
Activity Based Costing model, Cochlear Company Ltd can maintain cost leadership if its approval
gets goodwill from the management as well as the user department and the staff. This model is
an activity cost-oriented model, can help to quickly identify the avoidable costs within the
processes thereby helping the management make informed decisions as well as take
appropriate measures to mitigate against them or overly reduce them to manageable levels
(Weiner, Tu, Javan and Taheri 2018). Through this value will be added to the chain of activities
in production. The company will, therefore, be able to compete favorably regarding pricing
since the cost factors within the product chain would have been reduced or avoided. It will also
be able to maintain cost leadership through reduced costs. In the long run, the overall goals of
maximizing its profitability will be achieved. The value will also be added to customer focus
activities including improving the quality of their products as a result of decreased costs.
ACTIVITY BASED COSTING AND ITS SALIENT FEATURES
This is a costing technique that effectively allocates overheads to those activities which
it relates to in the organization. It can as well be used for the overall reduction of overhead
costs. The model can be best applicable in organizations harboring much machinery, producing

Activity Based Costing 5
many products as well as in those organizations that engage in complicated processes that are
not easy to separate (Redding and Turner 2015).
CIMA explains activity-based costing as an approach to the costing and monitoring of
activities, which involves tracing resource consumption and costing final outputs. Under this
method, resources are allocated to activities, and the activities are assigned to cost objects
(McBain et al. 2018).
It, therefore, gives room to managers to conclusively know about the final output and
consumer’s net profitability, thus making available to the business-critical information that will
aid managers make value-based as well as effective decisions that will help the organization
achieve its long-term growth and sustainability objective. In the ABC model, the first step
includes the identification and grouping of activities according to the cost ranking. The ranking
methodology groups the process activities according to the simplicity to which the costs are
readily identifiable to a given product. These ranks include the unit, batch, facility and the
product level (Navathe et al. 2017).
The unit level processes are those processes which are carried out on every single
product unit. Activities in the batch level are those which are performed whenever there is a
batch product production. Product-level activities are those who are separately undertaken for
every product unit. Facility-level activities involve those which are undertaken at the production
level. Unit level activities are the easiest to trace while facility level activities are the most
difficult to locate to products. Though the model will benefit the Company in the long run,
some of the limitations include: As a complex model, it is relatively difficult to implement it.
Since much time is required for the identification of the activities and the cost drivers; this

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makes it a complicated system to perform. The model is expensive, difficult to maintain and
adjust. The model, therefore, gives focus to cost drivers and the activities that lead to spiraling
costs of the organization (Weiner, Tu, Javan and Taheri 2018).
These are the characteristics of the activity-based costing model: The total costs are
apportioned as variable as well as fixed costs respectively. These costs help in the provision of
adequate information for the organization to come up with a favorable costing model. Then the
next feature is that under this approach, differences are derived out of the pattern as well as
cost behaviors. The designs, in the ABC model, are characterized by being time, diversity,
events, and volume related. Lastly, proper costs have to be known to help in tracing the
overhead costs associated with a given unit of a product (Esztergár, Rózsa and Tettamanti
2018).
How the ABC Model aligns with the organization's goals and strategies
Mission and objectives of the organization
As it continues its operations, Cochlear limited aims at achieving the following purposes,
enhancing the people’s ability to hear, enabling individuals to interact, changing individual’s
perception on hearing loss, as well as being innovative by delivering unique products in the
market (Viveros, Kalfa and Gollan 2018).
Objectives of the Cochlear Limited
Customer focus: The Company focuses on bringing customers lifetime value through the
following strategies, leading to innovative and quality products that meet their user and
customer needs. It will also ensure that there is adoption of customer-focused information

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systems that meet the customer needs as well as their preferences (Raz, Druehl and Blass
2018).
Organizational performance: Cochlear focuses on unique production activities which
are aimed at achieving its full potential and it made this through implementing culture and
values that individuals within the organization can quickly adapt to as well as providing tools
and processes for performance management.
Shareholder value: The Company ensures the creation and attainment of shareholder
value through revenue maximization, creating an optimal sales mix as well as adopting a
favorable dividend policy. The organization can, therefore, adopt the ABC model which could
help it effectively and efficiently allocate costs within the organization, hence helping it
minimize the probable costs as well as attain its objectives.
Corporate strategies adopted by Cochlear Company Limited.
For the organization to stay ahead of its competitors in the competitive market, the
company has adopted different strategies that will help it achieve its objectives as well as a
decrease on the costs that it would incur an increase its revenue streams over a period. For its
successful implementation, it has put in place the following strategies, ensuring leadership in
developing innovative products, ensuring unique and acceptable designs as well as having a full
commitment to the processes (Clarke and Gholamshahi 2018).
By fully adopting and implementing these strategies, Cochlear Company Ltd would thus
minimize costs that may accrue throughout the production process hence attaining value
maximization.

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How the Activity Based Costing model would help the company achieves its
strategies
By adopting and fully implementing the ABC model, the organization can effectively
achieve its strategies in different ways, including facilitating the process of cost efficiency
through the provision of more accurate and relevant information on the activities that it
undertakes (Goetsch and Davis 2014). Cochlear Company Limited can also maintain cost
leadership if its adoption gets goodwill from the management as well as the user department
and the staff.
This model is an activity cost-oriented model, can help to quickly identify the avoidable
costs within the processes thereby helping the management make informed decisions as well
as take appropriate measures to mitigate against them or overly reduce them to manageable
levels. Through this value will be added to the chain of activities in production ( Arora, Haleem
and Farooquie 2018). The Company will, therefore, be able to compete favorably regarding
pricing since the cost factors within the product chain would have been reduced or avoided. It
will also be able to maintain cost leadership through reduced costs. In the long run, the overall
goals of maximizing its profitability will be achieved (Majdalawieh and Marks 2018). The value
will also be added to customer focus activities including improving the quality of their products
as a result of decreased costs. The adoption and implementation of the ABC model will also
allow for an accurate calculation of the cost price of their products in the market, and the
clarity of the cost drivers will make it easier for the Company to identify the desired
improvements in the production process making it more cost-effective (Karami and Danesh
2018). The organization will be able to calculate cost price factors hence bring on the benefit to

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the organization's corporate strategy. As a result of all these activities, the primary objective of
the organization of maintaining its performance in the market will be achieved hence
maximizing the shareholder value (Allain and Laurin 2018).
Recommendations to Iron Mountain Incorporation on the adoption and
implementation of the ABC model
The successful operation of the system requires a full commitment and goodwill of the
staff of the organization. Cochlear Limited must ensure that all the parties in the organization
are committed they must also be motivated to ensure that all the employees and the
management are performing their duties as a group to enable the achievement of the
Company’s goal (Gillespie and Privitera 2018).
The management should be involved in the provision of active support to all the parties
that are engaged in the implementation process. They should provide enough resources
necessary for the implantation. The management should also ensure that all the staff is
supported and the issues that can hinder them from performing their duties are all solved.
Lastly, staff training is equally essential as it will assist all both the management and employees
to have a good understanding of how the Activity-based costing will help the organization in
achieving its objectives. Through this, the organization will be able to accomplish its mission as
well as meet its goals (Fang, Ma and Luo 2018).

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The alternative accounting tool that Cochlear Company Limited can
adopt
Since the company aims at, maximizing profitability, providing value to its customers as
well as maximizing the shareholder's wealth value, the best alternative model that Cochlear
Company limited should adopt is the Total quality model. This approach will ensure that there is
a reduction or elimination of errors in the organization (Ross 2017). It will also help the
Company to improve the experience of its Customers. As a result, the organization will be able
to minimize costs or entirely avoid the expenses that result in an overall increase in the costs of
the organization hence having a competitive edge against its competitors.
Conclusion
Organizations that aim at minimizing their costs are well placed to use the ABC model
since it operation involves an identification of the activities as well as identifying the expenses
within the businesses. This thus helps them to minimize the costs or avoid the costs entirely
easily. It can as well implement cost reduction strategies that can help it reduce the costs. It can
also be used by the organization to accurately assign costs to particular activities thereby
helping them to improve decision making. Since decision making is critical to any organization,
the ABC model will effectively provide useful information to aid it thus enabling it to achieve its
strategic goals. The organizations may experience a lot of difficulty in the implementation
process of the activity-based costing, but the enriched grasp and knowledge of the model
implementation enable it to be more valuable. Many organizations that implement Activity-

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based costing may only apply it effectively if they all observe the organizational, political and
behavioral aspects of the model implementation.

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References
Allain, E. and Laurin, C., 2018. Explaining implementation difficulties associated with activity-
based costing through system uses. Journal of Applied Accounting Research, (just-accepted),
pp.00-00.
Arora, R., Haleem, A. and Farooquie, A.J., 2018. Information Technology Enabled Supply Chain:
A Systematic Literature Review. IJAME.
Clarke, T. and Gholamshahi, S., 2018. Developing Human Capital for Knowledge Based
Economies. In Innovation in the Asia Pacific (pp. 247-270). Springer, Singapore.
Esztergár-Kiss, D., Rózsa, Z. and Tettamanti, T., 2018. Extensions of the Activity Chain
Optimization Method. Journal of Urban Technology, pp.1-18.
Fang, Y., Ma, Z.D. and Luo, Y.Z., 2018. Carbon Emission Modelling for Construction Logistics
Process Through Activity-Based Method. In Proceedings of the 21st International Symposium on
Advancement of Construction Management and Real Estate (pp. 413-424). Springer, Singapore.