Strategic Use of ABC Model in Insurance Australia Group Limited

This report assesses the suitability and benefits of implementing the Activity-Based Costing (ABC) model within Insurance Australia Group Limited (IAG). It details the features, uses, and application of the ABC model, emphasizing its alignment with IAG's strategic objectives, such as maintaining market leadership, expanding its Asian footprint, and accelerating digital transformation. The report recommends the implementation of the ABC model to enhance product costing accuracy, improve pricing decisions, and manage operational costs. Additionally, it suggests the Balance Scorecard as another effective managerial accounting tool for measuring and improving both financial and non-financial performance within the company. Desklib offers a wide range of solved assignments and study resources for students.

Managerial Accounting
1

Executive Summary
This report has been prepared during being appointed as one of the board of directors of the
organization Insurance Australia Group Limited so that the company’s CEO and senior managers
can be recommended on using the ABC model. Since the current business world is becoming
more complicated day by day, it is becoming necessary for organizations to implement
managerial accounting techniques so that the rapid developments and changes taking place can
be tackled. This report contains a discussion of the features, uses, application and benefits of
using ABC model within an organizational context. It also discusses about another effective
managerial accounting tool, the balance scorecard, showing how an organization can be
benefitting from using this tool as well.
2

Table of Contents
Introduction.....................................................................................................................................4
(a) An explanation of the ABC model and its features....................................................................5
(b) An explanation of how the ABC model aligns with the current strategies and goals of the
company..........................................................................................................................................6
(i) Identification of the company’s missions and objectives...........................................................6
(ii) Identification of the company’s corporate strategies................................................................6
(iii) Explanation of how the ABC model assists in achieving the company’s strategies..................7
(c) Providing different recommendations about the implementation of ABC model for the
company based on the research findings........................................................................................8
(d) Apart from the ABC model, suggestion on one other management accounting tool suitable
for the company..............................................................................................................................9
Conclusion......................................................................................................................................11
Reference list.................................................................................................................................12
3

Introduction
As the complexity in the external as well as internal environment and the competition among
rivals of a business is increasing with the advancement of time, managerial accounting, also
known as management accounting, has become an important part of all businesses. The various
tools and models of managerial accounting help a business in carrying out a wide range of
operations. One of the most effective models of managerial accounting used in firms around
the globe is the ABC. The ABC model, simply called the activity based costing, is a managerial
accounting tool that helps a company in increasing its effectiveness through identifying a firm’s
activities along with assigning indirect costs to the respective activities performed in a firm.
This report comprises of the discussion of the ABC model of managerial accounting along with
discussing the advantages and uses of using this model within an organization named Insurance
Australia. The Insurance Australia Group Limited, also called the IAG, is a multinational
company providing insurance related services to people with its headquarters in Sydney
(Iag.com.au, 2018). Founded during the year 2020, the Insurance Australia Group Limited, with
more than 15,000 employees, serves the areas of Thailand, Malaysia, New Zealand and
Australia (Iag.com.au, 2018). However, for ensuring that the operations of Insurance Australia
Group Limited is conducted smoothly and the company is able to accomplish its missions as
well as objectives, the activity based costing is important to be integrated in the company. The
report is going to be evaluating the application and the benefits of application of the ABC model
in the context of Insurance Australia Group Limited, so that the company’s objectives can be
accomplished successfully.
4

(a) An explanation of the ABC model and its features
The ABC model, also called the activity based costing model, refers to an efficient tool of
managerial accounting that is a methodology of costing used in a wide number of organizations
around the globe. As per this methodology, a company’s different types of activities are
identified, followed by the allocation or assignment of costs to each of these activities as well as
resources to every good or service of the company through actual consumption of each
resource (Laviana et al., 2016). As stated by Dong, Liu & Lin (2014), almost one company in
three companies implements the ABC model for the enhancement of the company’s accuracy
for costing its activities, for uncovering the true costs spent by it and for measuring its actual
profits from each of its goods and services.
There are different kinds of features possessed in the ABC model. As stated by Monroy et al.
(2014), ABC model has the following characteristic features -
 A company’s total costs are divided into fixed and variable cost, which is necessary to
provide data and information for designing a suitable costing system within the
company.
 In the methodology of activity based costing, an appropriate distinction is made
between the patterns of behavior of cost.
 The patterns of behavior of cost are time related, volume related, events related as well
as diversity related.
 The appropriate cost driver needs to be identified so that overheads can be traced of a
product or service.
 The cost drivers possess a dictation on the pattern of the behavior of cost in a firm.
5

(b) An explanation of how the ABC model aligns with the current strategies and goals of the
company
(i) Identification of the company’s missions and objectives
Formed through the demutualization of the insurance business of NRMA during the month of
July in the year 2002 and underpinned by ensuring the safety and betterment of its customers,
the Insurance Australia Group Limited has successfully become one of the renowned insurance
companies operating around the globe. However, for reaching its current position in the
market, there have been different types of initiatives that the company has taken and a number
of goals and objectives that the business has set. The mission statement of the company shows
what the company Insurance Australia Group Limited actually aims at becoming. The mission of
Insurance Australia Group Limited is becoming a more sustainable company over the long run
in order to deliver a more consistent and stronger return for its shareholders.
Insurance Australia Group Limited mentions that for the accomplishment of its vision and
mission, it works together with its clients, employees, partners, creditors and various other
stakeholders. There are two major objectives of the company Insurance Australia Group
Limited. The first objective of the company Insurance Australia Group Limited is making sure
that world is a safer place for its customers as well as its community and various other
stakeholders. The second objective of the company is delivering great experiences to customers
through leveraging the company’s market leadership for the creation of value for its own
people, its customers, its shareholders as well as its community.
(ii) Identification of the company’s corporate strategies
The priority of Insurance Australia Group Limited, similar to all other companies, is delivering
maximum value to its shareholders by ensuring sustainable and safe operations. There are
various strategic priorities of the company, focusing on which has helped it in becoming one of
the most successful insurance companies around the globe (Iag.com.au, 2018). There are three
major corporate strategies of the Insurance Australia Group Limited, which have been stated in
the points mentioned below -
6

 To maintain the company at the leading position in the market of commercial and
personal insurance in New Zealand and Australia
 To grow its Asian footprint as well as its contribution from earnings
 To accelerate the company’s digital transformation
(iii) Explanation of how the ABC model assists in achieving the company’s strategies
The model of ABC plays a vital role in order to accomplish a company’s corporate strategies.
The implementation and use of the ABC model in Insurance Australia Group Limited will be
helping the company in ensuring the accomplishment of all its three company’s market leading
position in commercial and personal insurance in New Zealand and Australia corporate
strategies.
For example, one of the strategies of the company is maintaining a leading position in the
market of commercial and personal insurance in New Zealand and Australia (Iag.com.au, 2018).
However, in order to maintain the leading position of the company in the market of Australia
and New Zealand, the company has to ensure that it maintains a more accurate system of
product or service costing, which will lead it to making accurate decisions related to pricing. In
order to ensure a strong and sound product costing system, it is important for the company to
integrate the ABC tool. This is because the ABC tool is one of the best techniques that can be
helping a company in bringing about efficiency in the costing of products and services of a
company. This tool also helps a company in bringing about accuracy in the pricing decisions of
an organization, which in turn will be helping Insurance Australia Group Limited in achieving its
strategy of maintaining its position as a leading insurance company.
At the same time, the strategy of Insurance Australia Group Limited to grow its Asian footprint
as well as its contribution from earnings can be achieved using the ABC technique. This is
because the first advantage of using this technique is that it ensures that the product costing
and pricing decisions are taken properly in a company, which will be beneficial for Insurance
Australia Group in creating a strong position in the Asian markets as well. The activity based
costing also helps a company in determining its non-value adding and costly activities more
7

clear and visible, which helps managers in eliminating them. This point is going to help
Insurance Australia in increasing its contribution from earnings.
The third strategy of Insurance Australia Group is to accelerate the company’s digital
transformation (Iag.com.au, 2018). However, in order to accelerate the digital transformation
of any company, huge amount of investments is needed and the costs spent by it have to be
carefully dealt it, which can be done with activity based costing as well. The activity based
costing technique helps a company through enabling the effective challenge of operating costs
for finding out better ways of allocating as well as eliminating overhead costs of a company.
Reducing the overhead costs and managing the overall costs of the company through ABC, will
be helping Insurance Australia Group in achieving its strategy of accelerating its digital
transformation.
(c) Providing different recommendations about the implementation of ABC model for the
company based on the research findings
As discussed in the above section, as the ABC model is going to be great help for achieving the
strategies of Insurance Australia Group, it is recommended to implement the model in the
company. In addition to acting as an aid in accomplishing Insurance Australia Group’s
strategies, implementation of the ABC model has various other advantages as well. According
to Oseifuah (2018), ABC helps a company in reducing its costs by giving meaningful information
about the opportunities available to it for reducing costs. Insurance Australia Group will be able
to reduce its costs with the help of the ABC model. On the other hand, Mahal & Hossain (2015)
stated that ABC model helps a company in making quality decisions by focusing over the
activities of a firm. This benefit will be applicable in case of Insurance Australia Group as well.
The company will be able to make effective decisions with the help of the ABC model.
The ABC model supports the techniques used in a company such as scorecards and continuous
improvement (Tsai et al., 2014). The techniques used in Insurance Australia Group such as the
continuous improvement that the company strives for will be backed with the ABC model,
thereby helping the company in achieving it. As stated by Weygandt et al. (2015), ABC model
8

helps a company in using its excess capacity through pooling activity costs and identifying cost
drivers. This will help Insurance Australia Group in using the excess capacity in the company.
Therefore, as the advantages of implementing the ABC model in Insurance Australia are high, it
is recommended that the company must be implementing it.
(d) Apart from the ABC model, suggestion on one other management accounting tool suitable
for the company
Apart from activity based costing, there are many other tools of managerial accounting as well.
The most appropriate managerial accounting tool for Insurance Australia Group Limited will be
the balance scorecard. The balance scorecard is a strategic management metric, which is used
in a company for measuring and improving its both financial and non-financial performance
(Hoque, 2014). The figure presented below indicates a balance scorecard -
Figure 1: The balance scorecard tool
(Source: Coe & Letza, 2014)
9

Sugiarto (2018) stated that the balance scorecard is useful for analyzing, communicating and
accomplishing an organization’s goals through control of its performance. On the other hand,
Khomba (2015) stated that balance scorecards are also helpful for showing the employees of a
company how their individual objectives are connected to the overall strategy of an
organization, thereby helping the organization in improving its efficiency. Balance scorecards
are also helpful for linking the strategies of a company with its daily activities. These benefits of
using a balance scorecard will be available to the Insurance Australia Group in case of
implementing the balance scorecard in the company. Thus, due to these reasons, a balance
scorecard is recommended to be implemented in the Insurance Australia Group Limited.
10

Conclusion
Hence, the discussion and analysis made in the report shows how managerial accounting and its
different types of models and tools help a firm in different ways. The evaluation of the ABC
model shows how and why this model in managerial accounting is necessary for implementing
in a company in order to accomplish the different objectives or goals of a company such as cost
control, cost minimization, efficient business decision-making, and effective product costing and
so on. The report also helps in reviewing how the ABC model can be benefitting the company
Insurance Australia Group Limited and how the company’s corporate strategies can be achieved
through implementation of this model. Lastly, the evaluation of the approach of the balance
scorecard indicates that another efficient managerial accounting tool used in a company is the
balance scorecard. The justifications of recommending Insurance Australia Group Limited to use
balance scorecards show how the performance and effectiveness of any firm can be enhanced
with the help of balance scorecards.
11

Reference list
Coe, N., & Letza, S. (2014). Two decades of the balanced scorecard: A review of
developments. The Poznan University of Economics Review, 14(1), 63.
Dong, J., Liu, C., & Lin, Z. (2014). Charging infrastructure planning for promoting battery electric
vehicles: An activity-based approach using multiday travel data. Transportation Research Part C:
Emerging Technologies, 38, 44-55.
Hoque, Z. (2014). 20 years of studies on the balanced scorecard: trends, accomplishments, gaps
and opportunities for future research. The British accounting review, 46(1), 33-59.
Iag.com.au (2018). IAG Limited. [online] Available at: https://www.iag.com.au/ [Accessed 23
May 2018].
Khomba, J. K. (2015). Conceptualisation of the Balanced Scorecard (BSC) model: A critical
review on its validity in Africa. International Journal of Commerce and Management, 25(4), 424-
441.
Laviana, A. A., Ilg, A. M., Veruttipong, D., Tan, H. J., Burke, M. A., Niedzwiecki, D. R., ... &
Kamrava, M. (2016). Utilizing time driven activity based costing to understand the short and‐ ‐ ‐
long term costs of treating localized, low risk prostate cancer.‐ ‐ Cancer, 122(3), 447-455.
Mahal, I., & Hossain, A. (2015). Activity-Based Costing (ABC)–An Effective Tool for Better
Management. Research Journal of Finance and Accounting, 6(4), 66-74.
Monroy, C. R., Nasiri, A., & Peláez, M. Á. (2014). Activity Based Costing, Time-Driven Activity
Based Costing and Lean Accounting: Differences among three accounting systems’ approach to
manufacturing. In Annals of Industrial Engineering 2012 (pp. 11-17). Springer, London.
Oseifuah, E. K. (2018). Activity based costing (ABC) in the public sector: benefits and
challenges. Management, 12, 4-2.
Sugiarto, B. (2018). Balanced Scorecard (BSC).
12