Management Accounting: Activity Based Costing in Australian Companies

This report provides an in-depth analysis of Activity Based Costing (ABC) and its application in Australian companies, drawing insights from two key studies. The report begins with an explanation of ABC, contrasting it with traditional costing methods and highlighting its benefits in terms of cost reduction and improved product costing accuracy. It then outlines the purposes and research questions of the studies, focusing on ABC adoption in Australian organizations and its implementation in agricultural farms. The report compares and contrasts the findings of the studies, noting the challenges and successes of ABC implementation, including the influence of accounting lag and the unique costing issues in agricultural production. Finally, the report discusses the outcomes of the studies, providing suggestions for management accountants on how to leverage ABC for strategic decision-making, cost control, and operational efficiency within Australian businesses. The report emphasizes the importance of ABC in enhancing profitability, improving performance measurement, and facilitating informed decisions regarding product pricing, design, and customer mix.

Management accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
A). Explanation of activity based costing...................................................................................1
B). Explaining the purpose of studies and research which needs to be explore from study.....3
C). The similarities and differences in the findings of two studies.............................................4
D). The outcomes from two studies that are useful for management accountants in Australian
.....................................................................................................................................................7
Companies...................................................................................................................................7
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Every business organisation has a primary objective to maximize its profit. In order to
make profit, its important to reduce the cost of production from revenue earned by selling of
product. Because of changes in different techniques of manufacturing different products, a new
costing techniques are required to evaluate costing techniques for product and services. Activity
based costing developed to overcome the drawbacks and shortcomings of traditional costing
system. Activity based costing is a modern technique to absorption costing which allows the
manager to understand profitability of both product and customer. The present report is based on
the study of two articles that which will help in understanding the need of developing activity
based costing system in operations of companies. However, the report will discuss the
implementation of ABC model in Australian manufacturing and agricultural farms. The report
will present the purpose and objectives of research. Further, the similarities and differences in
finding from both article will be discussed. The suggestions for management accountant are
included on the outcomes from the two studies.
A). Explanation of activity based costing.
Companies need new accounting system to track the costs of their operations. There are
several different methods that accountant uses to manage the financial operations of the
company. Two of the most commonly used costing system are traditional costing method and
Activity based costing method. Traditional costing system is an accounting method which is
used to ascertained the future profit of organisation (Activity-Based Costing Method in
Accounting, 2018). These method uses cause and effect techniques for determining direct and
indirect expenses in business operations. This system uses average overhead rate to the direct
costs of manufacturing products. Despite of being an easy and inexpensive costing system, it
does not present a clear picture of product cost. There are many unexpected expenses incurred in
manufactures process. Hence, the profit will be affected as total cost of manufacturing a product
becomes much more than the actual cost expected. As total cost increases, the revenue earned
will decrease unexpectedly.
Here comes a need of a new techniques of costing to companies, Activity based costing
developed to overcome the drawbacks and shortcomings of traditional costing system. The ABC
each activity has an assigned cost. Activity based costing first assigns costs to that activities

which are real cause for overhead. It than assign cost to that activities only to products that are
actually needed for activities. According to the ABC, it is the activity that consumes resources
and cost, not a product (Greasley, 2017. ). Hence, activities are not necessarily based on the
volume of production. It helps the management to understand which activity will make more
profit and where money is to be in cost-effective activity.
Activity based costing is a modern technique to absorption costing which allows the
manager to understand profitability of both product and customer. There are two stage allocation
process of Activity Based Costing:
in first stage, important activities in manufacturing products are identified,
and ,manufacturing overhead are assigned to each activity as per the organisation's cost used by
activity. There is a cost centre (activity cost pool) where overhead are assigned to each activities.
In second stage, the unit of an activity that causes changes that causes the change in the
cost of that activity is identified. Then the overheads are allocated from each activity cost centre
to each product as per the amount of cost consumed by that products.
Benefits of Activity based costing:
 ABC system helps in improving product cost information in a manufacturing process,
which allows accurate information to managers about the costs of making and selling
various products (Dale and Plunkett, 2017). ABC system helps in giving detailed
information of production which was deformity of information in traditional costing
system.
 One of the key benefit of ABC system are cost control and cost reduction that helps to
improve profitability. Cost reduction in ABC helps to identifying the activities that
responsible for over cost of an activities.. thus the cost analysis by activity based costing
helps in improving the operations and increases the operations and increases
profitability.
 Activity based costing is also assist in increasing the complete cost data for performance
measurement and assist the management of company to make to make proper decisions
on product pricing, product design, customer mix and profitability etc. the activity costs
are used to set targets and score goals around performance of the activity.

 Implementing ABC system helps the manager in budgeting and performance
measurement as the objective of each activity can be ascertained from the activity based
budgeting. Which will help in determining the future needs for the production.
Activity based costing system plays a significant role in management accounting
which helps the management of companies to develop a plan to for a competitive cost advantage
(Cooper, 2017). Activity based management helps managing the activities to reduce the cost of
production. Activity based costing helps in accomplishment of desired goals and objectives
efficiently and effectively.
B). Explaining the purpose of studies and research which needs to be explore from study.
As considering the two studies, it can be evaluated that Activity Based Costing is an
effective model which helps in identifies activities in an organization and assign cost to each
activity of all product and services according to the actual consumption by each. In this way, a
company can determine the cost of its per product or services in order to identifying and
eliminating those activities which are unprofitable for the company. ABC methodology is
important in an organisation to assign resources like costs to the activities to the products or
services provided to its customers. However, it is used as a tool to understand cost and
profitability of product and customers. Considering this, ABC has mostly used to support
strategic decisions such as pricing, outsourcing, identification and measurement of process
improvement. The two studies considered for research are Is ABC Adoption a Success in
Australia? And Implementation of the Activity-Based Costing Model for a Farm.
Purpose of research:
In relation with considered the study 1, it can be interpreted that Activity Based Costing
system is a procedure which helps in improves the accuracy of product/services costing and also
assists manager in understanding and evaluating the flow of resources across the organisation in
getting strategic outcomes. Study 1st will help in understanding that ABC system is an integral
part of management accounting as a technique which improves the accuracy of product/services
costing. The purpose of this research is to understand the competitive environment of the firm
which leads to the cost reduction, particularly if existing cost system fails to provide such
decision making system.

It has been considered in relation to 2nd study, it can be outlined that organisation which
involved in agricultural production faces a major challenges that management is facing regarding
costing of agricultural products. The purpose of this study is to develop an understanding the
implementation of ABC in farms and helps in eliminating the problems in implementation of
system in farms.
Research Questions:
 How adaptation of Activity Based Costing brings success in Australian organisations?
 What are the purposes of ABC in manufacturing or operational efficiency of a company?
 How an organisation can manage cost reduction , price control and allocation of cost to
activities with the application of ABC?
 What are the key techniques help in implementing effective costing system in
organization?
 What are the suggestions for the implications of ABC system to improve operational
efficiency of an organisation?
C). The similarities and differences in the findings of two studies.
As per the assessment of the 1st study Is ABC Adoption a Success in Australia? , the
findings indicates that Australian organisation which have implemented the ABC model found it
effective as compared to the traditional approach of costing. The research attempts to contribute
to such it can be said that ABC system has an integral part of ,management accounting as a tool
which help in improving the accuracy of product/services costing. It helps the manager in
understanding the use of resources in company.
Implementing ABC system is firm will help in cost reduction of product/services which
will help in effective decision making (Implementation of the Activity-Based Costing Model for a
Farm , 2018 ). The research has addressed the success of ABC in organisation which has
successfully implemented. Considering the implementation rate of ABC, it has increased in early
1991's and seen a slightly fall between 1194-1999. according to ABC implementation rate in
Australian, it was around 12%. the implementation rate in Australia is relatively low as
compared to US and UK. The reason could be that the company adopting ABC may not find this
system successful in delivering expected net benefits.

The research highlighted that the low adaptation rates is because of the change in degree
of adaptation. Explaining it as accounting lag which is the time lapse between development of
theory and application in practice. Adapting the new management accounting systems gives
benefits of accurate product costing, timely information, improvement in profitability and the
working environment. As per considering research it has found that the company have
implemented ABC system in their accounting successfully (Leahy and et.al., 2017). This finding
is a key contribution to the ABC model as it suggests that the low adoption rates are not the
result of a perceived lack of success of ABC in practice. the authors cautioned that most of the
firms surveyed had only been using ABC for a short period of time, which would make it
difficult to fully asses any benefits. Also, the majority were still using their existing costing
systems as well the ABC system had not been infused or integrated within the primary system.
This research highlighted that perceived success is not a determinant of low ABC
adoption. It was subsequently found that much higher ABC implementation rates (78%). As
suggested from the earlier findings of low implementation rates were due to the ‘accounting lag’.
However, it was argued that low implementation rates in study being one of the reason because
they had not distinguished between the different levels or degrees of implementation (Is ABC
Adoption a Success in Australia? , 2018). The study reported here, however, was based on only
one level of implementation being fully ABC implemented , and therefore we suggest
“accounting lag” is more likely the reason for subsequent increases in reported ABC
implementation rates. Further, it has been found that the measures of ABC success are believed
to be an effective measures of financial performance.
As per the assessment of the and 2nd study Implementation of the Activity-Based
Costing Model for a Farm, because of such unique nature of agricultural production costing of
products. Which become a major challenge to management of organisation involved in
agricultural production. The ability to applying non-volume driven cost drivers and disentangle
resources resource costs and cost objects through two-stage allocation process, Activity based
costing has the potential to address issues in costing of agricultural products (Activity Based
Costing ,2018). The research has shown that both agriculture and accounting are influential
economic sectors which respectively plays an important role in global economy. As per
International Accounting Standards(IAS)41 it is requires all biological assets which has to be

measured by fair value. However, from the research the need for the development of activity
based costing model in agricultural farms and organisation can be evaluated.
It can be addressed from the study that farms includes only simplified accounting reports
which are necessary in their tax purposes and aggregate financial performance of their
operations. There are no relevant information regarding production cost. This affects the
knowledge of farm's owner about the profitability of their product. Here comes the need to know
about the to know the operational cost and ability of farm so as to make effective strategy to
improve financial performance. In comparison to traditional costing system, activity based
costing model considers operating activities as key drivers of production costs. In this research, a
farm has selected which has implemented ABC model in their operations.
Similarities in both the articles:
As per assessment of both the articles, it can be determined that implementation of ABC
models is very important in both macro and micro levels. Research 1st has highlighted the
success of implementing ABC in Australian manufacturing sites, while research 2nd highlighted
the need of implementation of ABC models agricultural manufacturing or farms. The results
from finding of both the journals are that implementation rate in manufacturing firms and
agricultural farms are lower in Australia in comparison with another countries like UK and US.
Both the cases has reflected that the low implementation rate are because of accounting lag and
less knowledge about the effectiveness and features of Activity based costing system. In both the
research, the company or agricultural farms which has implemented complete ABS model in
their operations has viewed success in their overall performance.
Differences in the finding of two studies:
In finding of both the studies, it can be said that both the researches are different in
implementing process of ABC model. In 1st study the implementation rate in Australian
manufacturing companies has been discussed which is low because of the accounting lag.
Where in 2nd study the low implementation rate in agricultural farms is because of their less
focused on operating resources, as their full focused is on productivity than considering on
operational resources as well. The another difference in both the studies is need of ABC model
in their operations, in 1st journals the manufacturing companies in Australia are using traditional
based costing and see low success rate in implementing ABC model in their operations. Where,

in 2nd study, the farm owners are focusing on scientific techniques to increase their productivity
than than using accounting in their operations. Farms are using simple accounting techniques for
tax purposes only.
D). The outcomes from two studies that are useful for management accountants in Australian
Companies.
The outcomes that can be learned from the finding of both the articles are:
 Implementation of Activity Based Costing system in both manufacturing and agricultural
sectors are important for profit maximization by controlling overhead expenses and
eliminating waste resources in production system.
 It has been analysed from the researches that Australian manufacturing and agricultural
sector are not implementing the modern techniques of costing like ABC model, as
compared to other countries.
 From study 1st, it has been analysed that some manufacturing companies are not adapting
ABC model, as they see less success rate of using these cost techniques.
 From study 2nd, it is analysed that the agricultural farm are unaware about the importance
of ABC model to maximize their profitability of product line and reduction of waste in
biological assets they are consuming.
From the above outcomes, it can be suggested that implementing Activity based costing
will allows the management accountant to understand profitability of both product and customer
better. Implementing ABC system is firm will help in cost reduction of product/services which
will help in effective decision making for management. It will help to control the production
cost, and taking various decisions like pricing strategy, product mix, customer-satisfaction etc.
It can also be suggested that management should analysed the growth of other companies
in same sectors which are successfully implementing Activity based costing as modern
techniques of costing. It will help them to enhance the operational management of company in
order to reduce the production cost.

CONCLUSION
By summing up the above reports, it can be concluded that a proper implementation of
modern techniques of accounting is required in manufacturing and agricultural sector in
Australia. ABC system helps in improving product cost information in a manufacturing process,
which allows accurate information to managers about the costs of making and selling various
products. ABC system helps in giving detailed information of production which was deformity
of information in traditional costing system. The above report has concluded researches from two
articles which states the importance of implications of ABC model in Australian companies. The
report has present the purpose and objectives of research done. Further, the similarities and
differences in finding from both article has discussed in detail. The research has mentioned the
importance of Activity based costing model for management accountant in Australian companies
by concluding the lessons learnt from the study. The two articles that have taken are
Implementation of the Activity-Based Costing Model for a Farm and Is ABC Adoption a Success
in Australia?

REFERENCES
Books and Journals
Cooper, R., 2017. Target costing and value engineering. Routledge.
Dale, B. G. and Plunkett, J. J., 2017. Quality costing. Routledge.
Greasley, A., 2017. Simulation modelling for business. Routledge.
Leahy, M. F and et.al., 2017. Improved outcomes and reduced costs associated with a health‐
system–wide patient blood management program: a retrospective observational study in
four major adult tertiary‐care hospitals. Transfusion. 57(6). pp.1347-1358.
Online
Activity-Based Costing Method in Accounting. 2018 [Online] Available Through:
<https://smallbusiness.chron.com/activitybased-costing-method-accounting-52436.html>
Activity Based Costing .2018 [Online] Available
Through:<https://www.accountingcoach.com/activity-based-costing/explanation>
Is ABC Adoption a Success in Australia? . 2018 [Online] Available
Through:<file:///home/user/Downloads/Is_ABC_Adoption_a_Success_in_A.pdf>
Implementation of the Activity-Based Costing Model for a Farm . 2018 [Online] Available
Through: <file:///home/user/Downloads/Implementation_of_the_Activity.pdf>