Activity Based Costing and Management: Strategic Decision Making

This report provides a comprehensive analysis of Activity Based Costing (ABC) and Activity Based Management (ABM) techniques, crucial components of management accounting. The report begins with an executive summary, outlining the core concepts and applications of ABC and ABM, which ar...Read More

Activity based costing and Activity based management

Executive Summary
Activity-based costing is the approach for accounting which assigns the various costs to the
activities and the various activities are related to the projects, services, and products. In this
report, we had discussed techniques for management accounting and analyzing the various costs
which are linked with the products. Activity based costing and Activity based management has
been used by the industries for supporting the strategic decisions. The recent trends has been
analysed in which ABC helps in supporting the value cahin of the business. The application of
ABC and ABM helped in enhancing the effectivess and efficiency or the organization.

Contents
Introduction.................................................................................................................................................3
Literature review.........................................................................................................................................4
Analaysis of trends......................................................................................................................................7
Conclusion...................................................................................................................................................8
Reference...................................................................................................................................................10

Introduction
Activity-based costing is a method that is used for determining the true costs. It is a system that
is used in accounting for making the products efficient. Activity-based management is the
process to define the actions to be taken for providing the information with the help of Activity-
based costing. In this report, the techniques of management accounting will be discussed and it is
used in making strategic decisions. Recent trends of techniques will be analysed and its
effectiveness in various industries. In management the techniques are used in accounting for
analyzing the business for supporting the strategy formation, executing business, risk
management and making effective decisions. The challenges are faced by the company during
the implementation of technique but it is beneficial for different industries to adopt the
technique.
The aim of every company is to achieve the same level of output from production by lowering
the costs. There are various stages that are required in activity-based management are the
identify the activities which are to be performed in organization. The next step is to calculate the
cost of the various activities and the last step is to identify the activity cost driver for ache
activity. Activity-based management is of two types: operational activity-based management and
strategic activity-based management. Operational activity-based management includes doing the
things right and in strategic activity-based management includes doing the right things (Jong and
Kleiner, 2007).
Literature review
It is critical in business to select the right cost calculation method for determining the
profitability in the products for the benefits of business and customers. false information was
provided when the companies were using the traditional methods but after the implementation of
new method Activity-based costing. It was discovered that manufacturing of product generates
the losses, not profits so the profitability will be generated with the help of Activity-based
accounting.
Activity-based costing is the approach for accounting which assigns the various costs to the
activities and the various activities are related to the projects, services, and products (Gurcanli, et
al., 2015). Activity-based costing is the process that is based on designing, producing and

distributing the various products and services which require the activities. To perform the various
activities, the resources are purchased and resources are used for further process.
ABC cost hierarchy is included in all the business and they are categorized as Unit level- it
includes the cost which is required to produce one unit of products. Batch level- it includes the
cost which is required to produce each batch of product. Product level- it includes the cost which
is required for a specific product. Facility level- it is required to maintain the facility and plant.
Customer level- it is required to support the customer's activity
As per the views of Krumwiede (2008), he suggested that various factors are involved at the
different stages for implementing the information for innovation like the ABC method. The
various organizational and contextual factors help the business in the success of ABC analysis. It
is important at various levels and stages of the company for adoption and implementing the
system.
According to Marinus and Bouwman (2002), for improving the performance of finance which is
associated with the use of Activity-based costing and it includes the various conditions which are
involved in improving the process of business. he also stated that for investigating the
relationship between the performance of finance and ABC it requires confirmatory factor
analysis and structural equation modeling.
There are two alternatives to the traditional cost accounting systems. The alternatives are
Activity-based costing and theory of constraints. It is suggested that the theory of constraints if
used for long run. ABC technique is used for making the process easy for further production of
resources and converting the products for the use of customers. It is used as a powerful tool for
the purpose of pricing. ABC systems are also used for the implementation and implications of
managerial activities (Robert Kee and Charles Schimidt, 2007).
According to John C Lere (2010), for the pricing of products, it is used as a powerful tool than
the traditional costing system. It is effecient for determining the cost of each unit, batch and
product level of the activity. ABC system helps in analyzing the cost of resources which is used
for the consumption of the company. ABC and ABM systems help the company In focusing on
the activities and products which helps in tracing the cost-to-cost driver.

According to Brian H. Kleiner (2017), ABC and ABM systems help in achieving the desired
product costs which are accurate and it helps in tracking the costs of the different activities which
are included in the process of manufacturing of the products which consumers the resources in
the different activities. It is analyzed that the objective of implementation of ABC system is to
provide the maximum benefits to firm by lowering the different costs of production.
According to Baykasoglu & Kaplanoglu (2008), implementation of SCM helps in making better
use by implementing the various different techniques like Just-in-time, total quality management,
and enterprise resource planning system. In recent trends, ABC b system is the most developed
technique as it is considered for improving the SCM and performance of the company. In recent
trends, the modern business management technique is used for accounting the information for the
estimation of costs and reducing the costs as traditional management systems were not able to
perform such activities.
According to Sharma and Gupta (2010), it is necessary for the cut-throat competition is a recent
trend in the market in case of pricing and quality as it helps in increasing the customer's demand
and product differentiation. Implementation of ABC system helps in improving the method over
traditional methods in which the costs are collected on the basis of the different activities rather
than the quality of products and ABC system helps in contributing to the top management in
making the effective decision in the process.
As per the views of Lutilsky and Dragija (2012), the company faces various constraints in
implementation of ABC method in the company. They had considered the various parameters
which include the cost categories, activities, cost objects, and their drivers. They had considered
the most important obstacles which company faces are non-reliable information in the
accounting system, resistance to change, lack of management and legal barriers. Companies face
the challenge of implementing the system is that they are concerned and they are income-
oriented not cost oriented. In recent trend, it helps the company by identifying the channels,
products, and customers which are more profitable and least profitable for them to consider.
Companies are able to determine the real contributors in measuring the financial performance of
the company. It helps in accurately predicting the costs, requirement of costs and profits which
helps the company in changing the volume of production, cost of resources, and the structure of
organization. In manufacturing organizations, it helps the company in achieving a better position

of product in market and it increasing and enhancing the bargaining power of customers.
management can effectively track the various costs of activities and work processes. For the
customer's profitability, it helps the deducting the cost of products and services that cost to each
customer. ABC method plays a crucial role in the analysis of value chain of the business. ABC
helps in making the strategic decisions that involve the allocation of resources marketing, prices,
and product mix.
Michel Gervais (2010) has stated that time drive activity-based costing is used in manufacturing
and Logistics companies to providing the relevant information regarding utilization of capacity
and profitability in products than standard costing. In logistics and Transport Company, Time
driven activity-based costing helps them in making beneficial decisions to the management. In
logistics industry, the process includes the supply of right material at the right time and at the
right place. In order to define the economic advantage, it is necessary to record costs and analyze
the system to identify the methods for collaboration. ABC helps in reducing the logistics costs
and it helps in providing the level of customer service demanded. In logistics system, it helps in
identifying, measuring and comparing the various factors. The factors which are necessary for
the logistics company are the identification of cost drivers and activities in the structure of the
company. In logistics it helps in improving the profitability of business. ABC system helps in
planning the supply chain and making efficient relationships with the companies. In logistics
company, the challenges which are faced by the companies are reluctant of companies in
communicating information. ABC system helps in proving the important information about the
costs which are associated with the logistics activities in the company.
According to Davood Askarany (2010), supply chain management helps the managers in
improving the profitability, productivity, and performance of the organization. In SCM, the
information must be accurate which is regarding the cost of all the activities and the process of
the business. ABC technique helps in serving various types of improvement in supply chain
management process. During the implementation of ABC method for improving the SCM, the
more attention is required in the small firms than the large firms whether it is manufacturing or
non-manufacturing firm.
According to Swenson and Everaert (2012), in the process of the product development cycle, it is
necessary to emphasize the target costing for reducing the costs at the product designing stages.

It is analyzed that the factors influence the adoption of Activity-based costing, by assessing the
information and contributing to innovation at the time of adoption. ABC method is the best
method for improving the performance of the organization. Activity-Based Costing (ABC) is an
approach that assigns costs in an objective way through the “cost and effect relationships” in
which each activity cost is identified and assigned to each product or service only if such product
or service utilizes the activity.
Analaysis of trends
Implementation of Activity-based costing in manufacturing firms
Traditional costing includes the costs which provide the product and services on average
overhead rate. It includes all the indirect costs which are linked with the products and services
and these costs are equally applied on the products by using the machine hours as the cost driver
and ABC helps in determining all the costs and activities which are associated with the products
and services and helps the management in determining the cost of the product. Activity-based
costing systems are beneficial for the growth of the company. It is used as a powerful tool for the
purpose of decision making and implementation of ABC systems helps in increasing the
performance of operations as it helps in allocating the various overhead costs which are based on
the actual consumption of the resources in all the activities. It helps the management to recognize
the interdependencies to consider the cost drivers of each activity (Cagwin and Bouwman, 2002).
It also helps the management in analyzing the various necessary costs which occur in the process
of the business. It helps in providing the correct and accurate information about the resources and
consumption of resources which helps in increasing the profitability and efficiency in
organization. ABC and ABM systems helps the industry in three different ways which include in
estimating the cost for the purpose of pricing of product, it helps in guiding the marketers of
industry to make negotiations for reducing the costs and it also helps in indicating the various
areas infirm which requires the changes for the purpose of reducing costs and it will help in
satisfying the customers. In manufacturing environment, systems are used for integrating the
manufacturing process and it helps in diversifying the conventional costs in systems and helps in
making the report for distorted products (Tsai, et al., 2015).

Inventory management is important in every business having inventories. It is essential for them
to manage the stock level and in order to improve the inventory of the company for controlling
the existing situations and decreasing the cost of the company. ABC is a tool for handling
complexity in manufacturing process (Thomas, 2016). ABC provides activity-based information
to help managers understand and eliminate complexity. It is also a communication tool between
production and marketing and product design that helps minimize product changes which create
unnecessary complexity (Popesko, 2010).
It is stated that effective implementation of Activity-based costing helps the management in
providing the accurate costing of products and helps in managing the operations of business. It is
stated that the porter model helps in delineated the primary activities of business which helps in
adding value in the products from the customer's perspectives and the secondary activities in the
value chain helps in ensuring the efficient performance of the primary activities (Wegmann,
2011). ABC systems help in contributing global supply chain management as it provides the
information more accurately, updated and detailed information on the process and activities
which are included in the process of business. the adopting of ABC system in firms requires the
attention of supply chain management, but it is analyzed that the firms which are small in size
require more attention in comparison to the large firms and it can be manufacturing or non-
manufacturing firms. Adoption of Activity-based costing and management helps in improving
the financial performance by managing and controlling the various costs which are linked with
the process (Hoozée and Bruggeman, 2010).
Conclusion
Activity-based costing requires the process of the benefits to the organization. It is necessary to
identify the activities and then directly trace and estimate the various costs of the resources and
objects. It is necessary to assign the costs in the activities and calculation of activity costs is
estimated. The next step is assigning costs to the objects and then prepare the reports (Namazi,
2016). ABC and ABM help the business in providing functions like finance which are required
in business and the information is needed for making value-based decisions. It is concluded that
for prioritization the decisions, techniques are used for pricing the products. The ABC designer
can use the rules of ABC design to simplify the system without sacrificing the accuracy of
product cost. It is used for managing the inventory management and making the strategic

decisions. A well designed ABC system will also have no more detail than that required by the
manufacturing environment (Groves, et al., 2016). ABC/ABM is used for meeting the challenges
which are faced by companies in manufacturing and supply chain process. The different types of
ABM like Operational activity-based management which includes doing the things right and in
strategic activity-based management which includes doing the right things.

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