HI5017 Managerial Accounting Assignment Sample
Here’s the best sample of HI5017 Managerial Accounting Assignment, written by the expert.
Executive Summary
The report focus on the literature research to select and analyse two research journal articles to explore the managerial accounting area of Activity based costing (ABC) methodology. The ABC approach has gained relevance to overcome the inadequacy of traditional costing system for an organisation that needs accurate information for business decisions. The two research journal chosen explored the implementation of ABC costing method in different organisation (a hotel and an agricultural farm) and provided a wider understanding of Activity based costing concept. The report presents the purpose of the selected research articles and explains the objectives of the study that were set to explore by researchers. The similarity was identified among the two studies in its common purpose on its emphasis to investigate the ABC implementation and potential benefits of this approach over the traditional costing method. There was similarity among the research articles in terms of suitability of Activity based costing method for both the organisation. The difference was in terms of findings that focus on Activity-based costing method while other research focus was on Time driven Activity based costing and it also mention the challenges in implementation of this form of ABC method. Also, Time driven activity based costing is discussed in comparison to usual ABC method to deal with challenges in implementation of ABC method in the organisations due to data collection difficulty, cost to store and maintain data/processed information, difficulty in updating with changing circumstances, etc. Based on the lesson learnt from the literature research, justification is provided for the outcomes which can be helpful for the management accountants.
Overview of the report
Many organisations have faced difficulties with traditional method of cost accounting due to random allocations which has led to the application of activity-based costing (ABC) methodology. This methodology has gained relevance due to its defining and allocation for products supported with activities. Thus, costs are defined on the basic of multiple activities and costs are allocated to products for the activity utilization. This costing methodology helps the managers to link activity with finished product to provide them with a clear picture about cost of specific output to comprehend, identify and take suitable decision for production level and price of the product. In addition, Activity-based costing as a managerial accounting tool is assistive to managers to tract the activities cost to compare it with industry standards, measure product margin, customer profitability, production facility costs and distribution costs (Garrison et al., 2010). The significance of this methodology is in allocation of overhead to for products that consume activities in a logical and precise manner which is also useful to lower the overhead costs.
The focal point of this report is on Activity-based costing (ABC) which is an essential managerial accounting method. The report includes the investigation of research based journal articles on costing methodology of ABC for real life organisation. The report discusses the use of management accounting tool in understanding of the ABC methodology from the findings of the literature research of the selected journal articles. For this, the report explains the subject of Activity-based costing and provides description of the research purpose and research questions and /or research objective explored by the researchers of the selected journal articles, the similarities and points of differences among the two researches findings. The report also discusses the specific outcomes or lessons learned from the research findings of the selected articles and provide justification which can be valuable for management accountants in the Australian companies.
Description of Activity-based costing (ABC)
The cost accounting method of Activity based costing is based on the activities that consume resources which can be production, distribution, operations activity and other units of task/work. The activity can be at the level of organisation, customer, product, batch production and unit production, thus, an activity is a cost driver (Hilton and Platt, 2013). The process of activity based costing initiates with the identification of costs that needs to be allocated and followed by creation of different cost pools for the cost incurred in the providing services and costs that are aligned with the unit of work like production of any good or service. The information is obtained to know the activity drivers and these drivers are measured to allocate costs for each pool by a separate activity driver. The allocation of costs is done on the basis of dividing the total cost (in each cost pool) by total activity amount (in activity driver). This will give the cost per unit of activity which can be allocated to cost objects (like customers, products, services) on the basis of cost per unit depending on the use/consumption of the activity driver (Kaplan and Porter, 2011). It can be said that in this costing method final products are associated with production costs and administrative costs and also eliminate the inoperative activity that is not utilised to give precise costs estimates. Thus, some production costs that were not consumed will not be incorporated in rate of overhead allocation to get accurate costs which is not possible in traditional costing method.
Thus, the approach of ABC is to provide reliable and precise information of cost structure by allocation of cost pool on the basis of actual resources consumption to overcome the limitation of traditional costing system. This methodology is repeatedly used in manufacturing sector to estimate the overhead cost accurately which has increasing trend. As the overhead is related to activities cost the ABC method overcomes the problem faced by managers in allocation of cost based on machine hours/direct labour hours as done in the traditional approach. According to Horngren (2009), activity-based costing is more accurate in providing the actual efforts in cost per unit related to production. The characteristics of Activity based costing is to offer quality cost system information by dividing cost into fixed and variable costs and by identifying patterns of cost behaviour related to time, event, quantity and variety (Askarany et al., 2010). Another characteristic of ABC approach is that it traces the overhead cost to the final product or service delivery and allocate overhead based on activity.
The supporters of Activity based costing method of managerial accounting underline the usefulness of this method in relating cost, final products and overhead activities to estimate cost precisely and to increase the reliability of information for its production process and other relevant business decisions (Zimmerman and Yahya-Zadeh, 2011). It can be added that with the implementation of Activity based costing in an organisation the manager can obtain information about activity costs of services and take decision on overhead cost reduction as it provides a comprehensive view of each cost associates with final product. Thus, mangers can develop strategy on which cost can be lowered or eliminated to bring reduction in overhead costs. On the other side, it is argued by the supporters of other cost accounting tools over ABC cost accounting that ABC method of costing has only suitability to work in complex setting with many products and processes for allocation of overhead and its reduction and not in environment that has streamline processes in production (Garrison et al., 2010).
Description of the selected journal article studies
The first selected research based journal article of Riediansyaf (2014) discusses the Time Driven Activity Based Costing (TDABC) methodology application in the hospitality industry in the context of at Hotel Graha Cakra in Malang. Under the primary study of Riediansyaf (2014), the TDABC is applied for hotel room divisions for room rent activity as it is major source of revenue for a hotel. The purpose of this study is to apply time driven ABC methodology for the hotel product and service to gain insight and information towards costs structure for better decision making by managers. To realise this purpose, the research objective identified to be explored for this study is to provide information about operational cost structure by use of TDABC by computing direct and indirect costs, to compare TDABC results with costing methodology followed by the hotel and to demonstrate resources allocation in the hotel for delivering the product and services. According to Demeere et al. (2009), Time Driven Activity Based Costing (TDABC) is a simplified and revised approach to Activity-based costing (ABC) methodology. TDABC does not require manager to follow the traditional method of assigning the resource costs to activities and later to products or then to customers instead there is direct estimation of resource demand required by each product/ customer or for separate transaction (Ozyurek and Dinç, 2014).
The second selected journal article of Lu et al. (2016) described the Activity-based costing model for an Australian agricultural farm with reference to ‘S Ltd’ farm in the State of Victoria in Australia. This purpose of this study is to implement the Activity-based costing methodology for a 21 acre family owned Australian farm to highlight its potential in providing cost information of agricultural products and resource allocation for better farm management. Therefore, this study is set to develop an understanding of the process of ABC implementation to examine about how it can be implemented in farms and to investigate the issues faced in its implementation. It can be understood that the study of Lu et al. (2016) is positioned to explore the implementation of ABC method in farms focusing on the ‘how’ aspect and identify the challenges associated with ABC implementation. The modern method of Activity-based costing has been implemented by many organisations to overcome the shortcoming of traditional method for the lack of decision making information to managers (Zimmerman and Yahya-Zadeh, 2011).
Discussion on similarities and differences in the selected research studies findings
The similarity in between the studies of Riediansyaf (2014) and Lu et al. (2016) findings are related to the advantages of implementation Activity-based costing method in comparison to the traditional costing method. The findings also highlight the potential benefits of Activity-based costing methodology for the organisation in terms of better tracking of indirect costs, resource allocation and availability of information for the decision making process. The similarity in findings was also identified in the use of activity based accounting for the compilation of overhead costs in a more accurate way and to identify the consumption of resources by an organization.
From the findings of both studies, the similarity is also related in terms of applicability of the methods of Activity based accounting for both the organisation under study. Thus, it can be summarise that there was similarity among the research articles in terms of suitability in the agricultural sector and hospitality sector.
On the other hand, the main difference among the two studies is that the research findings of Lu et al. (2016) focuses on the implementation of Activity-based costing method while the research of Riediansyaf (2014) highlights the findings towards the implementation of Time Driven Activity Based Costing method. Also, the research of Lu et al. (2016) investigated the model of Activity based costing in agricultural farm and the factors influencing the implementation. The study also emphasise the role of communication among the developers of ANC model and farm operators significant in its implementation for farm. On the other hand, the research of Riediansyaf (2014) highlights the finding of cost calculation difference with the use of TDABC with target pricing approach of the organisation where TDABC was concluded to more accurate method for the case organisation while in other selected research no such comparison was made.
Another main difference that is identified among both the studies is that the study of Riediansyaf (2014) found the challenges faced in the implementation of conventional Activity based costing due to which the Time Driven Activity Based Costing framework is used to overcome the shortcoming of a usual ABC methodology. Similarly, the study of Lu et al. (2016) also holds difference in terms of stating the issue that can be faced in the Activity based costing model development for the organisation which is not mentioned in other selected research article. Thus, the research findings of Lu et al. (2016) also draws attention to the data availability and accessibility to limited resource as the key technical issues towards ABC costing development.
Lesson learned/outcome from research studies
The study of Riediansyaf (2014) result in understanding the application of TDABC for room division in a hotel to provide precise information on operational cost and profitability and how the resources is allocated for taking better decision based on this information. Here, the method of time driven ABC is implemented over usual ABC method. This study establish easy implementation of TDABC in five steps, by defining activities and their cost pools and measures, defining capacity supplied cots, defining practical capacity, establishing rate of capacity cost and estimating time consumption. It is learnt from the finding that the time driven ABC is a better option for organisations in situation where resources are observable to the activity while the usual ABC can be effective in situation where the activities can be easily traced to final products. Also, it brings to the attention the ease of system modification and update, less cost and time in data collection in TDABC in comparison to usual ABC. Thus, this will be useful for management accountants in Australian companies to learn about the difference among the usual ABC and Time Driven Activity Based Costing method. It can also be added that as the costing approach of TDABC has gained status due to few issues in implementation of ABC methodology in terms of time consumption in obtaining data from interview and/or survey, subjective data which is difficult to validate, high cost required to storage and process data and do not consider unused capacity (Dalci et al., 2010). It can be said that ABC model are expensive to develop and difficult to maintain and update as per changing situation requirements (Kaplan and Porter, 2011).
The study result of Riediansyaf (2014) also provides useful information to management accountants about the TDABC implementation which is found to be simpler that usual ABC method as it requires information on unit cost of activity and the time needed to carry out an activity. Thus, for Australian service organisations where the activities are measured based on the labour time used for execution an activity or with increasing overhead cost the TDABC system can be preferred (Szychta, 2010) and implemented over usual ABC approach for estimating cost structures, more precise estimates and can be modified as per changing circumstances.
From the study of Lu et al. (2016), it was learnt about the challenges faced in the implementation of the Activity based costing that can be taken into consideration by management accountants the during the incorporation of this methodology in the organisation. Thus, from this study result about the technical issues in establishing ABC model was taken into account to devise solution towards the data availability problem and limited resource availability for smooth incorporation. Thus, it is learned from the findings that in ABC implementation technical issue plays a more dominating role in comparison to behavioural issues. It is stated that there are several technical issue like identification and selection of suitable costs drivers, allocating resources to activities in case of limited resource situation and length time in collection of required data that affect the adoption and implementation of ABC system in an organisation (Mackevičius and Laurinavičienė, 2011). The management accountants can therefore, focus more on the technical issues as influencing variables than behavioural related and factors in development/ implementation of ABC model in the organisation.
From the study findings of Lu et al. (2016), it is also learnt that in establishing the ABC model in an organisation the role of heuristics holds significance. From this study, it is also clear that ABC model can be implemented in Australian organisation that requires costing of agricultural products by the use of heuristics approach. It can be said that better utilisation and incorporation of Activity based costing approach the principle of heuristics can be applied. It is stated that heuristics contribute in development and implementation of Activity based for its success in the organisation as the framework and principle of heuristics provides good scale of problem definition and specific problem formulation to provide guidance for problem solving and to evaluate the contingency (Zarei et al., 2015). According to Homburg (2004), using heuristic in ABC approach is also helpful in selection of cost drivers. Thus, this study outcome is helpful for the management accountant to learn about the use of heuristics for incorporating the ABC model for organisation that has wide range of products and has increase machinery use along with overhead costs.
Conclusion
From the above sections, it can be summarised that Activity based costing approach can fulfil the need of the organisations for accurate estimation of costs, tracking of indirect costs, allocation of resources and activities, overhead costs to cost objects for better decision making process. The Activity based costing was investigated and discussed by literature research analysis of two selected article journals. It was concluded from the selected research finding that the ABC methodology overcome the shortcoming of traditional costing method by allocating cost to activities which are linked to final product, services and customers and not based on departments or random allocation of costs. It can be also concluded from the selected research article that Time driven activity based costing is easier to implement and found to have several advantages over the usual activity based costing method. The selected article journals have been useful in comprehending the implementation of ABC methodology (including TDABC) in the two organisations (a hotel and an agricultural farm) where this approach has been found to be suitable over the existing tradition costing approach used in the organisation. The research findings were useful to learn about application of TDABC, difference among ABC and TDABC, shortcoming of usual ABC, challenges faced in the ABC implementation and the role of heuristics in ABC development and implementation. The knowledge can be helpful for the management accountants to take account of these in incorporating the ABC methodology in the Australian organisations. Both the selected article journals have been useful in varying level to understand the Activity based costing concept, development stages and its implementation in the organisation.
References
Askarany, D., Yazdifar, H. and Askary, S., 2010. Supply chain management, activity-based costing and organisational factors. International journal of production economics, 127(2), pp.238-248.
Dalci, I., Tanis, V. and Kosan, L., 2010. Customer profitability analysis with time-driven activity-based costing: a case study in a hotel. International Journal of contemporary hospitality Management, 22(5), pp.609-637.
Demeere, N., Stouthuysen, K. and Roodhooft, F., 2009. Time-driven activity-based costing in an outpatient clinic environment: development, relevance and managerial impact. Health policy, 92(2-3), pp.296-304.
Garrison, R.H., Noreen, E.W., Brewer, P.C. and McGowan, A., 2010. Managerial accounting. Issues in Accounting Education, 25(4), pp.792-793.
Hilton, R.W. and Platt, D.E., 2013. Managerial accounting: creating value in a dynamic business environment. UK: McGraw-Hill Education.
Homburg, C., 2004. Improving activity-based costing heuristics by higher-level cost drivers. European Journal of Operational Research, 157(2), pp.332-343.
Horngren, C.T., 2009. Cost accounting: A managerial emphasis, 13/e. India: Pearson Education.
Kaplan, R.S. and Porter, M.E., 2011. How to solve the cost crisis in health care. Harv Bus Rev, 89(9), pp.46-52.
Lu, C., Sridharan, V.G. and Tse, M.S., 2016. Implementation of the activity-based costing model for a farm: an Australian case. Journal of Applied Management Accounting Research, 14(2), pp.29-36.
Mackevičius, J. and Laurinavičienė, G., 2011. Implementation Problems of Activity-Based Costing Method (ABC). Business: Theory and Practice, 12, p.268.
Riediansyaf, M.D., 2014. The Application of Time Driven Activity Based Costing In the Hospitality Industry: An Exploratory Case Study. The Journal of Applied Management Accounting Research (JAMAR), 12(1), pp.27-54.
Szychta, A., 2010. Time-Driven Activity-Based Costing in Service Industries. Social Sciences (1392-0758), 67(1).
Zarei, B., Rad, R.S., Ghapanchi, F. and Ghapanchi, A.H., 2015. A Heuristic Approach to the Adoption and Implementation of Activity Based Costing Information Systems. Electronic Journal of Information Systems Evaluation, 18(1), p.59.
Zimmerman, J.L. and Yahya-Zadeh, M., 2011. Accounting for decision making and control. Issues in Accounting Education, 26(1), pp.258-259.
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