Analysis of Activity Based Costing System for Management Accounting

This report provides a comprehensive analysis of Activity Based Costing (ABC) systems, focusing on their implementation, advantages, and challenges within the context of a gaming chair manufacturing company, Secret Lab. The report begins by defining ABC and its role in modern cost accounting, highlighting its advantages over traditional methods in allocating fixed overhead. It then details the step-by-step implementation of an ABC system, the application of ABC system in the company, and the benefits such as improved product costing accuracy and better decision-making. Furthermore, the report examines the challenges encountered during ABC implementation, including employee resistance and the complexity of defining cost drivers. A comparative analysis between ABC and traditional costing methods is also presented, emphasizing the advantages of ABC in cost pool allocation and activity rate determination. The report concludes by summarizing the key findings and emphasizing the significance of ABC as a modern technique for effectively managing and allocating overhead costs.

Running head: MANAGEMENT ACCOUNTING
Management Accounting
Name of the Student:
Name of the University:
Author’s note:

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Table of Contents
Introduction:...............................................................................................................................2
Implementations of ABC Systems.............................................................................................3
Application of ABC system...................................................................................................4
Achievement of using Activity Costing System:...................................................................7
The challenges faced during the Implementation of ABC Systems:.....................................9
The comparative Advantages of ABC systems:...................................................................10
Conclusion:..............................................................................................................................10
References:...............................................................................................................................11

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Introduction:
Activity Based Costing (ABC) is the modern technique of charging fixed overhead to
product. ABC is particularly a technique of cost accounting, where fixed overhead is charged
to a product on the basis of quantum of activity that is consumed by the product. If a product
consumes lower quantum of activity then it will have a lower burden of fixed overhead,
however if a product consumes higher quantum of activity, higher burden of fixed overhead
is charged. An ABC system is identified as the connection between the cost and overhead
activities and the manufactured products, using such system normally it assigns the indirect
costs to the manufactured product, which is less complicated comparing with the traditional
methods (Allain and Laurin 2018).
Secret Lab is the gaming chair manufacturing company, established in the year 2014.
The company conducts its functions in Singapore (Headquarters), USA, Canada, United
Kingdom, South-East Asia, and Australia. This company is particularly specialized in the
manufacturing of gaming chair. This company was established by Ian Alexander Ang and
Alaric Choo, who started their business with the manufacturing of official furniture. This
company was officially launched in the year May 2015 in Singapore and later on its spread to
Malaysia and then Australia and in 2016 in the USA, and after that throughout the other part
of its operations. Because of conducting large manufacturing process and to operate the
costing information more accurately the company introduces ABC in their financial
department. Using this ABC system the company recorded all its financial, costing and
accounting data. It also provides the required helps to recognize the inefficiency of products,
activities, and departments. This system also helps to allocate available resources for
profitable production, activities, and departments, also helps to control the cost of the product
at the departmental level. ABC system also provides to eliminate the unnecessary cost that

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allocated to a product and finally this system enables the company to fix its product price or
service cost with proper analytical resolution (Ganorkar and Agarwal 2018).
Implementations of ABC Systems:
Using of ABC system, for Secret Lab the gaming chair manufacturing company
consider as the supplemental method of the cost accounting system that also contributes
towards decision making information in case of absent the traditional costing data analysis
method. This system is not limited by the business boundaries and even it cannot replace the
traditional costing methods as some time it fails to provide the basic requirements of financial
reporting. This ABC system particularly focused on cost allocation for manufacturing
products. It does not provide any contributes to any other general cost which is normally do
not have any indirect contribution towards the manufacturing cost, however, the traditional
costing method focused on direct expenses as well as other fixed expenses of the
manufactured products. For the implementation of ABC system for any manufacturing
concern, six-core steps are needed to be followed (Allain and Laurin 2018). In the case of
implementing the ABC system, Secret Lab – the chair manufacturing company is also
followed those few steps. Those Six core steps are as follows;
Identifications of the Activity:
The first activity to implement the Activity Based Costing system is identifying the
activity pools and grouped the cost according to their activity. This activity was also assigned
by the Secret Lab for the implementation of such a system procedure.
Analysis of the Activities:
In the second stage, the implementation of ABC system in Secret Lab analyzes the
activities of the manufacturing process which identifies the procedures to support the product
cost and avoid the inaccuracies that occurred in the traditional costing methods.

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Cost of Assignment
Followed the first two stages of implementation the next steps that followed by the
Secret Lab was Assignment costs based on activity pools. For an example the cost relating to
human resources would require to assign to indirect management cost or administrative cost.
Activity rates calculations
The fourth stage of implementation ABC system followed by the Secret Lab -the
organization was calculation of the activity rates. As the part of initial analysis the direct
labor hours may include along with the indirect labor support for the purpose of calculation
the product cost. All the weighted cost relating to products normally added at this stage. For
an example, product labor hours of Secret Lab are required to be present always in terms of
weighted labor rate including the beneficial cost of the product.
Cost assign relating to cost objects
The fifth stage of implementation was assign the cost according to its objects, after
the cost of activities, pools and rates at once are clearly identified. Those objects are normally
the price that would be offered by Secret Lab to the customers in general. In both the case of
manufacturing or non-manufacturing concern the product should have some definite sale
value comparing to the cost that assigned.
Arrangement and allocation of management reports
The final stage of Activity Costing System implementation is needed to submit the
managerial reports of Secret Lab. The company has to analysis the complete costing data in a
justified way so that it can produce the final costing report as per managerial requirement.
Application of ABC system
The Secret Lab implementing the Activity Based Costing system in the case of
Analyze the costing data more accurately compared with the using of the traditional methods.

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Secret Lab how efficiently is using this ABC system, analyzed thorough the cost data of the
company. Providing an example for this purposes (US 2019);
Secret Lab makes two types of chair, a hand-built lounge chair and a folding beach
chair. The company using the job order costing system and overheads are applied on the basis
of direct labor hours. The company expecting to produce 40000 lounge chairs and 100000
beaches chair in the next year. Direct material costs are $3200000 for lounge chairs and
$1000000 for the beach chairs. The company provides the following results from the first
stage cost allocation for yearly production.

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Achievement of using Activity Costing System:
Through the Implementation of the Activity Based Costing System, Secret Lab the
chair manufacturing organization achieved the following advantages relating to Costing data
analysis and submission of costing reports (Ganorkar and Agarwal 2018).
Accuracy in product costing:

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Focusing particularly on the causes and effects of incurred costs for a particular
product the ABC systems provide more accuracy and compatibility relating to cost
determination. In general those are the activities which are relating to the cost of production
of gaming chairs manufactured by the Secret Lab, that means those costs are related to the
product price. For the manufacturing concern where the technology and other activities
relating to cost contribute a large share to the total assets such systems provides more
accuracy in that case.
Information relating to cost behavior:
One of the benefits of using this systems are it helps to identify the actual cost
behavior and reduced the cost of products and also helps to recognize the costs which
generally do not add any further cost to the products. Using this system the managers of
Secret Lab organization generally control the fixed costs in case of reducing the product
prices. This control is probably possible because of the behavioral costs of many products
now became clear and visible.
Tracking the Activities for the cost objects:
In this system generally many cost drivers are used that are transaction based
comparing to product volume. These systems enable many activities of Secret Lab relating to
product cost which may not possibly track in traditional costing method.
Tracking the overhead cost:
For the managerial and other production purpose of Secret Lab this system keep track
on all the overheads that relating to product price so that the overall product cost can be
derived easily.
Efficient for decision making:
Using this system the Secret Lab – the gaming chair manufacturing organization is
able to make proper and effective decisions for managerial purposes. Its helps to fix the price

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of selling products more accurately as all the costing data relating to the products are
available.
Management Cost:
This system generally provides rates of cost driver and information relating to
volumes of transactions, which are useful for the Secret Lab, manufacturing organization’s
management for decision making purpose. Such cost drivers are used to making the design of
new products (gaming chairs) as they are related to the overhead cost which are used to
analyze the products costing.
Beneficial for the service Industry:
Those systems are beneficial for manufacturing concern as well as for the service
sectors too. Traditional costing method is generally inappropriate for those service industries
as most of overheads are involved in service industries and with less direct costs, this once is
considered as one of the main advantages of using ABC systems for Secret Lab.
The challenges faced during the Implementation of ABC Systems:
In case of implementation of the ABC system the Secret Lab – gaming chair
manufacturing organization faced several problems. In the first part pointing out the primary
factors and in second part indicating the secondary facts those are impacting negatively in
case of implementation of ABC System (Allain and Laurin 2018).
Primary:
 Absence of adequate knowledge and skills among the employees of Secret Lab- the
organization.
 ABC system is required so many details record of costing data which makes it more
complex for Secret Lab.
 Such systems are more time-consuming for Secret Lab and also costly.

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 Most of time, in case of implementation such systems was resistant by the employees
of Secret Lab.
Secondary:
 Improper training to the employees of Secret Lab.
 High implementation cost, which is contributed by Secret Lab, basically in case of
cost relating to Information technology.
 Difficulties in defining and identifying cost drivers and cost centers of Secret Lab.
 Negative perception from the employees of Secret Lab.
 Lack in support from the top management of Secret Lab.
The comparative Advantages of ABC systems:
For the purpose of discussion the advantages of ABC system in Secret Lab, using
through the comparison of another costing system which is called Traditional Costing method
(Christian 2018).
Cost Pool: In traditional costing normally used one cost pools , whereas in case of ABC
system Secret Lab use one cost tool for each stages, that means the costing data can analysis
more accurately with such system.
Costs: In traditional costing system total overhead cost are measured, whereas in case of
Secret Lab the ABC system Total overhead is generally divided among the cost pools.
Pre-determined Activity rates: In traditional system cost is determined one plant wise, where
for the ABC system one rate is used for each activity cost pools.

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Conclusion:
It can be concluded from the above discussion that the ABC system is considered as
one of the major modern techniques of charging fixed overhead to products. In the first part
of the discussions disclosing the applications and using of ABC system in Secret Lab, which
is engaged in manufacturing of gaming chair. Next to the basic discussions includes the steps
of implementation of such ABC system in the organization and the positive impacts of such
system. The application and impacts of this system were analyzed through a problem which
providing the various cost of the departments. After the problem analysis, this report is
pointing out the achievements that derived from the systems and also the challenges normally
faced during the implementation of the ABC costing systems. In the ending part, this report is
narrating the comparative analysis between the ABC system and Traditional costing methods.

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pp.181-198.
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Benefits from Implementation of Activity Based Costing in Selected Manufacturing Units in
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Babu, M.A. and Masum, M.H., 2019. Crucial Factors for the Implementation of Activity-
Based Costing System: A Comprehensive Study of Bangladesh. ABC Research Alert, 7(1).
Christian, D., 2018. Building Cost Management: Case Study Using Costing Methods. IJAME.
Durán, O. and Durán, P., 2018. Activity Based Costing for Wastewater Treatment and Reuse
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C.A. and Rohde, L.E., 2018. PP50 MicrocostingWith Time-Driven Activity-Based Costing
Applied On Brazilian HTA System: ECMO Case Study. International Journal of Technology
Assessment in Health Care, 34(S1), pp.85-86.
Ganorkar, A.B., Lakhe, R.R. and Agrawal, K.N., 2019. Methodology for application of
Maynard Operation Sequence Technique (MOST) for time-driven activity-based costing
(TDABC). International Journal of Productivity and Performance Management, 68(1), pp.2-
25.
Jalalabadi, F., Milewicz, A.L., Shah, S.R., HollierJr, L.H. and Reece, E.M., 2018, November.
Activity-Based Costing. In Seminars in Plastic Surgery (Vol. 32, No. 04, pp. 182-186).
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