Activity-Based Costing (ABC) Analysis and BHP Billiton's Suitability

This report examines the implementation of Activity-Based Costing (ABC) within BHP Billiton, an Anglo-Australian multinational mining company. It begins with an executive summary and introduction, outlining the report's purpose: to determine the suitability of ABC in a dynamic business environment. The report describes BHP Billiton, details the features of ABC, and contrasts it with traditional costing methods. It explores how ABC can facilitate planning, control activities, reduce costs, and improve decision-making. The analysis highlights ABC's benefits for BHP Billiton, including enhanced cost allocation and improved understanding of cost drivers. The report concludes that ABC is effective for BHP Billiton, offering recommendations based on the findings. The report also includes sections on company values, features of ABC, differences between ABC and traditional costing, and ways ABC can facilitate planning and control activities within the company. References are provided.

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BHP Billiton
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Executive summary
The report is prepared with the purpose to determine that the companies in the dynamic
environment should accept activity-based costing technique or not. The analysis has been on
BHP Billiton that is Anglo-Australian multinational mining, metals, as well as petroleum dual-
listed public company. The findings of the report show the concept of the activity-based costing
method for the businesses. The features of ABC are determined which shows the nature of the
method. It has been determined that there are differences in the traditional costing and activity-
based costing method. The findings show that implement of ABC allows the company to reduce
cost, attain objectives and improve the decision making which means it can facilitate planning
and control activities of BHP. In the end, it has been found that the implementation of ABC is
effective for BHP Billiton.

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Contents
Introduction......................................................................................................................................3
Description of chosen company.......................................................................................................3
Description of Activity based costing and its features....................................................................5
Features of Activity based costing method..................................................................................7
Difference between ABC and traditional costing method...............................................................8
Ways that ABC can facilitate planning and control activities in BHP 600...................................10
Contribute in reducing the Cost.................................................................................................10
Contribute in attaining the objective..........................................................................................11
Improves decision making of company.....................................................................................11
Suitability of the ABC for BHP Billiton........................................................................................12
Conclusion and recommendations.................................................................................................14
References......................................................................................................................................15

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Introduction
In the current business environment, there is a significant rise in the domestic as well as foreign
competition, automation and changing the structure of cost which is compelling manufacturers to
have a look upon the improved understanding of the accounting system and also the requirement
of the real-time information system. Businesses generally deal with the issue of the high
complexity in the structure as they found high non-value added costs. This is the reason due to
which they embrace activity-based costing method which allows companies to determine and to
reduce the non-value-added costs. There are numerous reasons due to which the company adopt
the activity-based costing method as structure of cost for their business. Being recently employed
as a management trainee in the manufacturing company, the director of the company provided a
task to explore the possibility of implementing an Activity-based Budgeting system within the
company. The purpose of report is to comment on suitability of the activity-based budgeting for
BHP group limited company.
The report initiates with the overview of the company then it provides the description of the
Activity-based costing (ABC) and its related features. Furthermore, the differences between the
Activities based costing method and traditional costing method has been done. There are
different ways that ABC can facilitate planning and control activities in BHP Company which is
discussed. In the end, an implementation of the ABC method is appropriate for company or not is
discussed.

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Description of the chosen company
BHP Company is recognized as BHP Billiton which is transaction object of the BHP Group
Limited and BHP Group plc, Anglo-Australian multinational mining, metals, as well as
petroleum dual-listed public company with the head office in Melbourne, Victoria, Australia.
The business is considered a world foremost resource corporation. It process and extract
minerals, oil and gas with over than 72,000 personnel as well as contractors majorly lie in the
Americas and Australia (BHP, 2019). The purpose of company corporate is to bring resources
and people collectively to build an improved world. The strategy which is applied by BHP
Billiton is to have best commodities, best capabilities and also to form the long-term worth with
the great returns (BHP (2018).
(Source: BHP, 2019)
The company is growing which is evident from the graph given above which shows that there is
a strong financial performance that is attained this year. It has been found that profit of business
has been improved. In year 2018, the profit of the company is less than in 2017 but in 2019 the
profit improved which was $8.3 billion (BHP, 2019). However, on the other hand, it is witnessed
that the cash flow for the year 2019 declined as comparing it from the year 2018.

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Values of the company
The below given are the values of the company which are followed by them for their operations.
 Sustainability: - Putting health and safety on importance being accountable towards
environment as well as assisting groups.
 Integrity: - Performing correct things and doing what the company say will do.
 Respect: - The value of respect shows embracing the openness, trust, teamwork,
relationship and diversity that mutually offer the benefits (BHP, 2019).
 Performance: - Attaining the superior results of the business by extending the abilities.
 Simplicity: - Concentrating on the hard work on belongings that influence the most.
 Accountability: - Explaining as well as accepting accountability as well as offering on
the commitments.
Description of Activity-based costing and its features
Activity-based costing (ABC) is one the well-recognised method of the costing that contribute
effectively in determining different activities within the company and also allocate the cost of
every activity associated with the products as well as services as per real intake by each
(Accounting Tools, 2019). ABC assigns overhead charges majorly in dual phases:
 Stage 1: Overhead prices are assigned to the activity cost pools.
 Stage 2: The overhead costs assign to the cost pools are allocated to the goods by making
use of cost drivers (Vetchagool, Augustyn and Tayles, 2018).
The academic research reflects that ABC contributes effectively in allocating the production
overhead expenses to the crops in a reasonable way while comparing it with the traditional

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method of simply assigning the prices based on the machine period (Jeyaraj, 2015). Further, it
allocates cost for those actions only to goods that are really demanding related actions.
In current decade, implementation of the activity-based costing is effective as: -
 There is a significant rise in the manufacturing overhead cost of business.
 The charge of the overhead in the manufacturing is no elongated linked with productive
machine hours or the straight labour hours.
 The need for the ABC is there due to the diversity of the products as well as the diversity
in the needs of the customers which has significant improvement (Dale and Plunkett,
2017).
 ABC is vital for the products that are manufactured in the large batches while on the
other hand some of them are produced in the small batches.
CIMA authorized terminology explains the ABC as an method to costing as well as observing of
the actions that consists of tracing the costing and feeding of the final outputs. The resources of
the company are assigned to doings and activities to object of the cost. ABC was majorly
explained in the last 1980s by Kaplan and Bruns due to which it is considered as contemporary
substitute to observation costing which permits manager to well comprehend product as well as
client net profitability (CGMA, 2013). This costing method helps business to get improved data
to make the value-based and therefore more effective choices. It has been found that activity-
based costing method provides benefits to their clients once they implement the same. Some of
the benefits are given below: -
 It offers one of the most important benefit to the company that is overall beginning and
visible advantage which is very essential for measuring the cost of the products that are

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required to be obtained by the company in the accurate manner and also for making the
product mix decision as well as pricing decision made so better factory management
(Sherman, 2018). The company was able to determine the relative profitability of the
goods as well as helps in understanding the cost drivers. ABC method supports the
company while making the decisions related to the process of the capital budgeting (Wu,
Wang and Cheng, 2015).
 The pooling of the cost by the activities areas offers the details that might assist to make
the better plan as well as control costs. The data that is generated with the help of ABC
can contribute to encourage the businesses to redesign the products and make effective
use of any other common parts (Drury, 2013).
 ABC is considered as one of the flexible budgets due to which it is considered as more
accurate while comparing it with the traditional budgets. The reason behind this is that
multiple cost drivers are determined to explain behaviour of overheads costs.
Features of Activity-based costing method
 ABC method is an accurate method which is one of major features as it allows the
business to analyse the product as well as service costing.
 The method allows the company to easily manage the cost that is aligned with their
business activities (Edmonds, Edmonds, Tsay and Olds, 2016).
 The model of the ABC provides the company with the details of overhead costing which
can be eliminated and reduced which generate a competitive advantage within the
market.
 One of the features of the ABC model is the emphasis on the activities from which they
can bring the decline in the cost.

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 ABC features help the companies to make strong decisions which are essential for growth
of company.
 Activity-based costing maintains characteristics that help them to provide assistance
related to the performance management techniques like scorecards and management
techniques (Noreen, Brewer and Garrison, 2011).
Difference between ABC and traditional costing method
In the academic research suggests that ABC is modern costing method while comparing it with
the traditional method of costing. There are some of the major differences that are present in both
the methods of costing (Weygandt, Kimmel and Kieso, 2015). The table given below reflects on
the differences between the traditional costing method and the activity-based costing methods
that are implemented by the businesses.
Basis Traditional costing method Activity-based costing method
Definition Traditional costing is considered as
the best used when the overhead of
the company is low compared to the
direct costs of products (Woodruff,
2019).
ABC generally determines all the
particular overhead operations that are
linked to the manufacture of every
product. This has been found that the
entire product needs the assistance of
the overhead costs.
Accuracy
The traditional method of costing
contributes in providing accurate
data. However, due to lack of modern
approach, there is the possibility of
ABC is most accurate for getting the
results. When the traditional costing
method finds any issue of inaccuracy
through there system then an effective

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the high inaccuracy (CGMA, 2013). implementation of the ABC can help
them to get the accurate data. The
evaluation of the accuracy is essential
as it helps the company to decide which
profit is considered as profitable.
Cost The traditional costing method is less
expensive when comparing it with
the modern approach of ABC.
ABC costing is considered to be more
expensive when comparing it to
traditional method of costing
(Zimmerman and Yahya-Zadeh, 2011).
Tracing of
cost or
products
In the traditional costing method,
costs are first traced to an
organisational unit which includes
department and then to the products.
In the activity-based costing, the costs
of the product/services are identified as
per the primary principle that activities
consume resources costs.
Drivers Traditional absorption costing trends
emphasis on the volume-related
drives which include labour hours.
The emphasis of the ABC method is on
the cost drivers activities that contribute
in improving the cost of the operations.
Structure The traditional costing method
adopted by the company as they
generally focus on structure rather
than on the procedures.
ABC method emphasis on activities or
processes instead on structure
(Oseifuah, 2018).
True cost Cost accountants know that the
traditional cost accounting can hide
or distort the details on the costs of
On the other hand, it is witnessed that
the ABC method actually promotes a
wish to comprehend the actual costs of

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the individual goods as well as
services majorly when it comes to the
cost allocation rules misrepresent the
true resource usage.
the individual products as well as
services in an accurate manner. Thus,
this is the reason due to which the
companies implement the activity-
based costing method.
Ways that ABC can facilitate planning and control activities in BHP 600
The research reflects that there are certain ways that ABC can enable planning as well as the
control activities of the BHP Billiton.
Contribute in reducing the Cost
The company is known as the world’s biggest miner due to which it is scheduling to offer a sum
of $US1.6 billion in terms of the productivity gains across the mining processes of Australia over
the next two years. The company is able to generate high revenue but with this expenditure of
company are high which they are planning to reduce. It has been found that the company is
planning to bring the cost cut by $2.2bn (Gary, 2017). The company plan to continue finds the
savings by bringing the expertise from the different industries as well as better leveraging the
technology. However, effective implementation of the ABC can allow the company to plan for
reducing the cost by eliminating the overhead costs that are linked with different actions of
business.

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Contribute in attaining objective
Every company is formed with certain objectives through which they can meet requirements of
the clients. BHP Billiton objective is to form the long-term shareholder value through the
acquisition, discovery, development as well as marketing of the natural resources. The objective
can be attained by the company with the implementation of the activity-based costing method
within their business. It is the fact that to meet the objective, the company is involved within the
different activities so that they can develop, discover and acquire natural resources. The cost is
associated with every activity and it is essential to manage the cost that is linked with the
activities (Nagasaka and Lee, 2017). The implementation of ABC will help them to attain their
objective by reducing the additional cost that the company spend as the overhead cost. The
overhead cost affects the revenue to the most which lead to a decline in the payment of the
dividend. This will lead to an impact on the long-term shareholder value of the company. The
shareholders will not be able to unite with the company. Along with this, when the company
finds that they need to pay the high amount for the acquisition and discovery then they don’t get
indulge among such activities. The implementation of the ABC model will support BHP
Company to meet its objectives and attain high growth in the market.
Improves decision making of the company
One of the ways through which ABC can facilitate planning and control is by improving the
decision making of the company. BHP Billiton contributes in improving the decision making as
applying the ABC will contribute in reducing or eliminating the overhead costs. The planning
and controlling decisions are taken by the company which helps them to attain high growth and
even more chances for the expansion of the business.

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Suitability of the ABC for BHP Billiton
This section of the report throws the light on the suitability of the ABC approach for the BHP
Billiton Company. The entire research shows that activity-based costing method is considered as
one of the suitable methods for the company while comparing it with the traditional costing
method. BHP Company falls in the manufacturing as well as the production of the mining and
coal which is considered as one of the major element. The research supports the point that the
implementation of the ABC model is suitable for the companies that fall in the manufacturing
rather than the service company. It is suitable for the company because of the different reasons
which are presented below: -
 ABC helps in the overhead allocation system that contributes in offering the accurate
product cost that helps in forming the right decision related to the future planning of the
operations.
 The implementation of the ABC approach is most suitable as it helps in reducing the cost
of the activities which ultimately contribute in improving the revenue.
 BHP Billiton Company finds the ABC most suitable model for them as it helps them in
producing the value for their partners who are present in the market. This is possible with
the help of the analysis of the manufacturing activities that are carried out within the
company. The production measures of the activities are also allocation bases but they are
majorly the production measures for the internal as well as the external customers. Thus,
this is the way through which company can ensure that they are able to form the
connection with their partners.

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 ABC model is suitable as it helps in value perspective that can be improved by grouping
entire activities in entire processes that usually offer a bunch of the value attributes which
is an object easier to compare the value which is predicted by the clients.
 BHP Billiton Company found that it is hard to implement the ABC costing method as this
is considered as complex and include the high cost. Thus, this point shows that there
might be a possibility that the company is not able to implement the method effectively.
In the end, the overall conclusion shows that the company might face some problem but it is
suitable for them which offer them many benefits due to which ABC costing method is suitable
for the company.

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Conclusion and recommendations
At the end of the report, this can be concluded that Activity-based costing method is considered
as one of the modern costing methods that are used by the companies to generally eliminate the
cost associated with activities that are considered as the overhead cost. The report is prepared on
the ASX listed company that is BHP Billiton. It includes the analysis of the company which
shows that the performance of the company is improving. The discussion about activity-based
costing has been improved. There is a discussion about the feature of the activity-based costing
which reflects the nature of the costing method that the company is willing to implement. The
analysis summarized that there are many differences between the traditional costing method and
activity-based costing method. Currently, most of the companies are adopting this method as
they are looking for accurate as well as reliable data. This information helps them in making the
right decisions at the right time. There are many ways that ABC can facilitate the planning and
control activities of BHP Billiton. Further, this can be concluded that ABC offers a wide range of
opportunities to the companies due to which it is considered as suitable for the BHP Billiton as
they should adopt this method of costing. It is recommended that this method will help them in
eliminating the additional cost.

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References
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https://www.accountingtools.com/articles/2017/5/14/activity-based-costing [Accessed on 29th
January 2019]
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centre/annual-report-2018/ [Accessed on 29th January 2019]
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company/about-us/ [Accessed on 29th January 2019]
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https://www.bhp.com/-/media/documents/investors/annual-reports/2019/
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Dale, B.G. and Plunkett, J.J. (2017) Quality costing. Routledge.
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accounting concepts. McGraw-Hill Education.

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