Activity-Based Costing Analysis for Volkswagen Group: Report

This report provides an in-depth analysis of Activity-Based Costing (ABC) as applied to the Volkswagen Group, a major global automobile manufacturer. The report begins with an introduction to ABC, highlighting its advantages over traditional costing methods in allocating indirect costs more accurately. It then addresses specific questions, including the benefits of ABC for Volkswagen, the dangers of broad averaging, and a step-by-step guide to implementing ABC within the organization. The report also explores cost classifications relevant to Volkswagen, such as output unit-level, batch-level, product-sustaining, and facility-sustaining costs. Furthermore, the report discusses the potential challenges and significant opportunities that Volkswagen may encounter after implementing ABC, such as the cost of implementation, the potential for data misinterpretation, enhanced business processes, and the identification of wasteful products. The conclusion reinforces the potential benefits of ABC for Volkswagen, emphasizing the need to consider the challenges for effective system functionality.

Running head: ACTIVITY-BASED COSTING
Activity-Based Costing
Name of the Student:
Name of the University:
Author’s Note:
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Table of Contents
Introduction:....................................................................................................................................2
Answer to Question 1:.....................................................................................................................2
Answer to Question 2:.....................................................................................................................2
Answer to Question 3:.....................................................................................................................3
Answer to Question 4:.....................................................................................................................4
Answer to Question 5:.....................................................................................................................5
Answer to Question 6:.....................................................................................................................5
Conclusion:......................................................................................................................................5
References:......................................................................................................................................6

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Introduction:
Activity-based costing is a method of accounting, which identifies and allocates costs to
overhead activities and then the costs are assigned to products. In other words, this system
realises the association among costs, manufactured products and overhead activities and thus, it
is possible to allocate indirect costs to products in a better manner than the traditional costing
system (Childress et al., 2015). However, some critical factors need to be taken into
consideration to apply the activity-based costing system in a big manufacturing organisation.
This assignment would shed light on the various factors related to the application of this system
in the context of Volkswagen Group, which is a big global automobile firm.
Answer to Question 1:
Activity-based costing (ABC) system is a supplemental cost accounting technique that
enables in undertaking suitable decisions not present in the conventional methods of costing.
Despite the fact that the business unit boundaries do not limit the ABC system, it could not
entirely supplant the conventional methods of costing, since it does not fulfil the financial
reporting needs for business organisations (Cooper, 2017). For Volkswagen Group, it would not
attribute the other general costs not having at least indirect association to the cars manufactured.
The conventional costing systems concentrate on indirect costs and the cars would be burdened
with other fixed costs. Thus, applying the ABC system in Volkswagen Group would enhance the
accuracy related to allocation of indirect cost.

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Answer to Question 2:
Broad averaging explains costing approach, which utilises broad averages to allocate
the resource cost uniquely to objects of cost. If the difference in resource consumption is ignored
by various cost objects, it could lead to inaccurate product costing (Dwivedi & Chakraborty,
2016). If the managers of Volkswagen Group find under costing in selling vehicles on which it is
losing money at the time they believe erroneously the vehicles to be profitable. On the other
hand, over costing might lead to rivals entering the market and obtaining market share for those
automobiles that the organisation believes erroneously are not highly profitable.
Answer to Question 3:
Volkswagen Group needs to follow the following series of steps for implementing the
ABC system within the organisation:
Activity identification:
Initially, the activities need to be identified and they would be grouped in activity pools.
These pools might consist of fractionally allocated costs in order to support activities to
individual vehicles as suitable during the second step.
Activity analysis:
This system needs activity analysis identical to process mapping inherent in lean
manufacturing (Plank, 2018). Thus, this activity analysis would help Volkswagen Group in
identifying indirect cost relationships along with enabling allocating some percent of activity to
the final product directly.
Allocation of costs:

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Depending on the findings of the above two steps, there is allocation of costs to activity
pool. For instance, costs of human resources would be allocated to indirect management or
administrative costs and the pools would contribute to cost object.
Calculation of activity rates:
The initial evaluation might include indirect support labour or direct labour hours. Such
activities need to be allocated to real currency value. Volkswagen Group needs to include all
weightings in this step.
Allocation of costs to cost objects:
After the identification and definition of activity costs, rates and pools, the organisation
needs to allocate them to cost objects. As Volkswagen operates in manufacturing environment,
the vehicles must have resale value for contrasting with the allocated costs.
Preparation and distribution of management reports:
After the evaluation of ABC system, the cost data need to be put in coherent and concise
manner for process owners and cost object of Volkswagen Group. The costing analysis
communication is crucial for justifying analysis cost, as this cost is not inconsequential.
Answer to Question 4:
The types of cost classification for Volkswagen Group include the following:
 The output unit-level costs are the activity costs conducted for each product unit.
 The batch-level costs are associated with group of units of vehicles like supplier
payments.

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 The product-sustaining costs are those used for supporting individual products
irrespective of the batches or units like drawing process charts (Subramaniam & Watson,
2016).
 The facility-sustaining costs are the activity costs, which the managers could not trace to
distinct products; however, it assists the entire organisation like insurance rent.
Answer to Question 5:
Certain challenges are bound to take place in Volkswagen in implementing ABC
system within the organisation and they are described as follows:
 It is expensive to implement, as the organisation needs to appoint a specialist along with
providing training on its use for the staffs.
 The data generated could be misinterpreted, as they do not comply with the external
reporting and accounting standards (Weygandt, Kimmel & Kieso, 2015).
Answer to Question 6:
There are significant opportunities that Volkswagen could enjoy after implementing ABc
system within the organisation and they are enumerated briefly as follows:
 This system enhances the business processes, as Volkswagen could use it in detecting
activities that are not adding value to the organisation.
 ABC system would help the organisation in identification of wasteful products by fixing
the prices of vehicles, which are incorrect or excessive.

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Conclusion:
Based on the above evaluation, it could be stated that Volkswagen Group could be
immensely benefitted by using the ABC system within the organisation. These benefits include
improvement of business processes and identification of wasteful products. However, it needs to
consider the challenges as well for effective functioning of the system within the organisation.

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References:
Childress, S., Nichols, B., Charlton, B., & Coe, S. (2015). Using an activity-based model to
explore the potential impacts of automated vehicles. Transportation Research Record: Journal of
the Transportation Research Board, (2493), 99-106.
Cooper, R. (2017). Target costing and value engineering. Routledge.
Dwivedi, R., & Chakraborty, S. (2016). Adoption of an activity based costing model in an Indian
steel plant. Business: Theory and Practice, 17, 289.
Plank, P. (2018). Introduction. In Price and Product-Mix Decisions Under Different Cost
Systems (pp. 1-5). Springer Gabler, Wiesbaden.
Subramaniam, C., & Watson, M. W. (2016). Additional evidence on the sticky behavior of costs.
In Advances in Management Accounting (pp. 275-305). Emerald Group Publishing Limited.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & managerial accounting.
John Wiley & Sons.

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