Assignment Requirements: You are required to prepare a report about your findings from the literature research, and discuss how it has helped your understanding of your chosen topic. The report should cover the following:
This Managerial Accounting Assignment is prepared for the purpose of identifying the importance of managerial accounting in an organization that is working in Australian business industry. Specifics has been given in this report toward one of the apportionment methods i.e. activity-based costing method. This Managerial Accounting Assignment has analysed the advantages and disadvantages of activity-based costing method. This Managerial Accounting Assignment has also analysed different academic papers issued in accounting and management journals. At the end of the report, time-driven activity-based costing method will also be discussed in order to analyse its advantages and difference from traditional activity costing method. At last this Managerial Accounting Assignment will analyse the implementation of time driven activity-based costing method in one of the telecom company industry working in Australia.
Managerial accounting has become of the most important part that contributes towards efficiency and effectiveness. Management accounting can be defined as the process of preparing management reports that can help the organization in increasing the efficiency of business operations. Management Accounting also helps in the identification of major problems that business operations are facing and solutions can be effectively implemented for these problems. In addition to the right Management, accounting is also helpful in predicting the future in respect of various variables that can affect business organization such as sales, cost structure, indirect expenses, the demand of particular product and service etc. This Managerial Accounting Assignment will explain the concept of activity-based costing and how this concept can be used for the development of an organization. One of the biggest problems that are generally faced by Business organizations is an apportionment of overhead cost (Zimmerman and Yahya-Zadeh, 2011). Apportionment of direct cost is very easy because it is directly identifiable to a particular product or service direct costs helps in the production of goods and services during the process of production. But only direct cost cannot be charged from customers as there are various business Industries that incur a substantial amount of indirect cost and if such cost is not charged on product or service the company will incur huge losses. Activity-based costing can be defined as the method of effectively apportioning overhead cost incurred by a business organization in the production of goods and services. Another concept that will be discussed in this Managerial Accounting Assignment is time driven activity-based costing which is a concept derived from activity-based costing to identify limitations and improve the concept of activity-based costing.
There are various methods that are generally used by the business organization for apportionment of indirect cost identify price to be charged from the customer. ABC costing is one of these methods and it is adopted by various organizations due to its advantages over traditional methods of apportionment of indirect cost. The main characteristic of ABC costing is that it helps in recognition of the relationship between overhead cost and overhead activities in relation to a particular manufactured product. For example, this method will analyse that transportation cost can be related to total distance covered by a particular delivery van (Langfield-Smith et.al, 2017). Therefore, it will be more relevant if transportation cost is apportioned on the basis of delivery distance for a particular product rather than apportionment on the basis of a number of units produced.
This method is very popularly used in the manufacturing sector because traditional methods of cost were not representing profitability from particular product services manufactured by them. Majority of the traditional methods used to apportion the indirect cost on the basis of machine hour or labour hour used for the production of goods and services. This was not a very efficient method as there are various activities that will not represent true profitability is apportionment is done on the basis of machine hour or labour hour. Adoption of activity-based costing helps in identify true profitability from particular goods and services. This also helps the business organization to increase the overall profitability of the company as they were able to identify the most profitable segment of the business and more resources can be devoted toward such segment (Ward, 2012).
Comparison with traditional costing method: Basic assumption- Basic assumption in case of traditional costing methods was that indirect cost is consumed by goods and services that are in the production process. But in the case of ABC costing it is assumed that indirect cost is incurred on activity that is used to support the production process. This is engine is better as compared to the assumption used in traditional costing as indirect cost are not directly related to the process of production.
Method of apportionment- factors related to volume was taken under consideration while conducting apportionment of indirect cost in traditional costing methods. In ABC costing specific cost drivers are identified by management in accordance with the nature of the activity that is resulting in particular indirect cost. Here also ABC costing is an advantage as compared to traditional costing method because all the indirect activities in the production process cannot be directly related to the volume of production. For example, transportation cost would not have any relationship between numbers of units produced by the company rather it will be more efficient for management of the company to apportion such cost on the basis of distance travelled by delivery vehicle (Langfield-Smith et.al, 2017).
Orientation- the traditional costing method wall structure oriented, on the other hand, the orientation of the ABC costing method is toward the process. That means that ABC costing method is apportioning the indirect cost on the basis of a process that is conducted on product and services after the manufacturing process.
Profitability evaluation- It is described by a various expert in the field of managerial accounting at ABC costing method is much more accurate in presentation of profitability from a single product or service. This is due to the fact that it is a better method that can help in the apportionment of indirect cost. Indirect cost is a substantial part of the overall cost incurred in the process of providing goods and services to the customer. This could not have been identified in case of traditional costing methods because apportionment was done on the basis or number of units produced. If an instance of managerial salary is taken then according to traditional costing method it should be apportioned on the basis of a number of units produced. but there is a possibility that product that is produced in higher quantity does not generally require much inspection because it is produced on automatic machinery whereas other product latest produced in smaller quantity is a human intrinsic product which will require more inspection. Therefore, in this case, traditional costing method would not represent actual cost incurred because apportionment of inspection was not correct (Dale and Plunkett, 2017).
On the basis of this comparison, it can be said that ABC costing method is much more relevant in the current business environment as compared to traditional costing method. Appropriate costing of a product is very essential for the business organization because if higher prices are charged then the customer will move alternate product if lower prices are charged then it would lead to a decline in profitability for the company.
Huynh, Gong, and Tran in their academic research paper have identified how integration between ABC costing and standard costing can be very profitable for a business organization. Today's business environment is very competitive and every business organization is looking for ways to gain a competitive advantage over other business organization in the industry.
Managerial accounting and efficiency in management accounting are one of a method that can help the business organization in gaining such a competitive advantage. Integration of standard costing with ABC costing can help business organizations in bringing more efficiency in management accounting processes which will ultimately increase the overall profitability of the company. According to the Management Accounting has various advantages that can be used by managers and employees to bring efficiency in business operations. ABC costing is not limited to provide accurate financial information as it can also help by providing non-financial data to managers working at the different level of organization (Huynh et.al, 2014). For example, ABC costing can identify the route activities that are creating expenses and value for overall business processes. Management of the organization can easily identify the amount of expense and value created by a particular activity so that improvements can image insert activity for the purpose of cost cutting.
They have also conducted various surveys in which they have identified that the rate of implementation of ABC costing is very low despite all the advantages that are brought in with the implementation of ABC costing. According to them in Australia, the average rate of implementation is 26.29% that shows that only 26 companies out of 100 are effectively using activity-based costing for apportionment of their indirect expenses. After search evaluation, it is important to identify the disadvantages or limitations that are bought in by activity-based costing in a working business environment. It is true that there are some limitations to activity-based costing that has resulted in a low average rate of implementation in Australian companies.
Disadvantages of activity-based costing
1. Construction of ABC models- one of the biggest disadvantages of ABC costing method is the construction of a model that will help in the implementation of ABC costing. It is essential for business organizations to identify all the activities that are undertaken by a company that results in indirect costs ancillary to the production of goods and services. It is very easy for business organizations that are smaller in size and amount of indirect expenses in lower to identify all the activities so that cost drivers can be established. But it is very difficult for organizations that are conducting numerous amounts of activities for bringing their product to customers. In such a scenario it is very difficult for the management of the company to formulate cost drivers for ABC costing.
2. Cost- The cost of implementation of the ABC costing method can be a very complex process that increases the estimated cost of implementation. The accuracy of this method is totally dependent on the cost drivers that are implemented by the management. Therefore, it is important for a business organization that experts are hired by an organization in order to the proper implementation of ABC costing (Kaplan, 2014). This can be very costly that is not generally affordable for small organizations. Majority of the business organization operating in Australia are small and medium-size organizations. This shows the reason for the lower adoption rate of ABC costing in Australian organizations.
The disadvantages mentioned above can be integrated or limited by the management of the company by integration of standard costing and activity-based costing. The main objective of this Framework is to provide accurate information in ABC costing methods in order to facilitate appropriate decision-making process by the management of the company. The main problem with activity-based costing is that identification of cost driver is very difficult for small and medium-size organizations. Standard costing results and past information can be used by Business organizations in order to facilitate cost drivers in ABC costing method. Standard consumption pattern can be used by management of the company in order to identify resource consumption rather than identification of hundreds of activities that are performed in a business organization (Salem and Mazhar, 2014).
Other methods that can be used for mitigation of limitations generated by activity-based costing is time driven activity-based costing. Time-driven activity-based costing is a very new concept that is developed specifically to cope up with the disadvantages of activity-based costing method. There are various advantages that can be helpful to mitigate the limiting factors of activity-based costing. The biggest limitation of activity-based costing is that cost drivers are required to be identified for each and every business activity. Time-driven activity-based costing method only uses one cost driver for every activity in the production process that is time. Apportionment of indirect cost and another related cost to be included in selling price to be charged from the customer is done on the basis of time taken to complete a particular activity. It has all the advantages of activity-based costing and one of the most important limitations of activity-based costing is mitigated in this costing method.
It can be easily applied to a company that is operating in a very complex business industry. Cost of implementation in this type of ABC costing method will also be very low as compared to traditional ABC costing method. In a research conducted by Anderson and Kaplan in the year 2017, it was identified that around 20 medium size and small size companies have implemented a time-driven ABC costing method effectively. it was also identified that profitability of the companies was improved with the implementation of this costing method as compared to traditional costing methods were used prior to implementation of time driven activity-based costing (Elhamma and Zhang, 2013). The cost of implementation that is required for implementation of the traditional costing method was very high as compared to the actual cost incurred by these organizations in order to implement TDABC.
They also implemented this costing system in medium size electronic company and finding of this research was very positive. They are identified that time driven ABC costing method was very effective in working with the ERP system of the company. Efficiency was better as compared to traditional ABC costing method. Level of accuracy in this costing method was a little Goa as compared to traditional costing method but it does not affect the efficiency of Management decisions to be taken in operations of the business.
ABC costing in the telecom sector: According to views presented by Al-Dhubaibi, Rahman and Haniff, financial reporting has given more importance as compared to Management Accounting which is not a good factor for the growth and development of the business organization. There is a requirement of giving equal importance to both of these branches of accounting (Saad Al-Dhubaibi et.al, 2013).
Difference between TDABC costing and ABC costing
1. Cost drivers: In ABC costing the cost drivers for each and every resource is different for example for delivery cost driver would be a number of deliveries and for packing cost driver would be pack material consumed. Whereas in the case of Time-driven ABC, the cost driver is a combination of cost per time unit and the time required to complete an activity. Hence application of time-driven ABC is simpler and more efficient as compared to ABC costing.
2. Capacity assumption : In ABC costing it is assumed that all the resources are working at their full capacity but in reality, this is not the case as there are downtimes and idle times. This assumption is not taken in Time-driven ABC as generally resource is assumed to be working like 80 to 90% of their full capacity (Adioti & Valverde, 2013).
3. Cost and time requirement: Time and cost required in traditional ABC costing are way higher as compared to time-driven ABC costing. This is because, in ABC costing, managers have to decide appropriate and accurate cost drivers for each and every resource which is very complex and lengthy process. This process also required the consultation of different experts which further increases the cost of the management process. Cost driver in case of time-driven ABC is same i.e. time (Ayvaz & Pehlivanl, 2011).
4. Efficiently in large-scale organization: ABC costing cannot be implemented efficiently on a large-scale organization as it involves an excessive number of activities and resources. In such cases, it is best to apply time-driven ABC costing.
5. Accuracy level: Accuracy level in ABC costing is better as compared to Time-driven ABC costing method. Separate cost drivers are obtained for each resource which is more relevant and accurate. Time-driven ABC has a single cost driver i.e. time (Ayvaz & Pehlivanl, 2011). This driver may not be accurate in all the cases especially in cases of industries with non-human resources such as machines and equipment.
Time-driven activity-based costing in Telstra Corporation: This Managerial Accounting Assignment has already established the fact that the overall benefits of implementing time-driven ABC are more effective as compared to traditional activity-based costing method. This section will analyze whether TDABC will be beneficial to an organization working in a service industry such as telecom industry and the company that has implemented TDABC is Telstra Corporation
Telecommunication Companies such as Telstra limited are providing a variety of services to its customers. Therefore, is very important to calculate an accurate cost of each of these services to arrive at an appropriate price that could be charged to these customers. The traditional method is not appropriate to implement in case of a company working in the services industry as this method is more focused on assigning a cost to the particular product.
There is some limitation of traditional activity-based costing method which includes ineffective implementation and increased cost in the case of a large organization. Telstra Corporation Limited is one of the largest companies in Australia with a large number of resources. Therefore, it would be effective to implement cost driven ABC costing method. In addition to this TDABC will also help the company to evaluate unutilized capacity so that no cost is allocated to such portion of resources. The suitability of TDABC can also be evaluated with its successful implementation in other service sectors such as insurance, finance, hospitality, etc. Explanation to support this opinion is described by Kaplan & Anderson in their book (Monroy, Nasiri & Peláez, 2014).
Time-driven ABC helps in solving the problem of complexity in the management process and released time can be utilized by the company in more productive management processes. The requirements for detailing out each and every process of the company are relaxed in this process. This method also helps in better resource allocation and management process. Resources available to each organization are always limited and in the service industry, it is important to make the best possible use of these resources.
Managerial accounting can be described as a process of preparation of reports and accounts by the management of a company. The main objective of managerial accounting is to get timely, accurate and relevant information to make long term and short-term management decisions. This Managerial Accounting Assignment has analyzed some of the methods used in managerial accounting such as activity-based accounting, time-based activity-based costing and traditional method of costing. It can be concluded that activity-based costing method Time-driven activity-based costing method is an efficient method of costing and it will be adopted by various companies in the future. Managerial Accounting Assignment are being prepared by our accounting assignment help experts from top universities which let us to provide you a reliable assignment help online service.
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