You are required to prepare a report to comment on the suitability of the TDABC for a company of your choice (your firm’s client). The report should cover the followings:
a) A description of your firm’s client
b) A description of the TDABC and its features
c) In what ways TDABC is different from Activity-Based Costing and traditional costing systems
d) A discussion on whether the TDABC is suitable to your firm’s client
During the period of 1980, method of activity based costing (ABC) is introduced for the purpose of addressing the issues arise from traditional methods of cost management. However, traditional methods of costing consider only few categories of cost that are labor, material, and overhead. This can be understood through example, companies engaged in manufacturing process only determine the elements of labor and material and these elements are used by the products manufactured by company on individual basis. Indirect cost and support cost is allocated by the cost system of these companies in accompany of those measures which are already determined by the company such as direct hours of labor and direct labor dollars. After some time, this approach of cost creates issues for organizations and this result in original model of ABC. Later, this new model also creates issues in case of large scale organizations. However, elimination of this model is not the solution, and because of this new version of this model is developed which removes all the disadvantages of original model. This new model of ABC is known as the Time-Driven Activity-Based Costing (TDABC) (Kaplan & Anderson, 2004).
TDABC is very simple model and easy to operate and it helps the organization in calculating the cost and capacity consumption of their resources. It ensures effective and efficient way of managing the cost system in the organization which improves the cost management system of the organization. TDABC also help the mangers in getting accurate and reliable information related to cost and profit because of which it becomes easy for mangers to manage the project. TDABC also maintain the relationship between the customers and the organization (Akhavan, ward & Bozic, 2016).
Structure of this report includes the brief information about the client that is Wesfarmers, discussion on TDABC and its aspects, difference between TDABC and its original model & TDABC and other traditional methods of costing, suitability of TDABC in case Wesfarmers. Lastly, paper is concluded with brief conclusion.
During the period of 1914, company named as Wesfarmers was established in the form of Western Australian farmers’ cooperative. After some time this company becomes the largest listed companies in Australia.
Global headquarter of Wesfarmers is established in Western Australia and this company conduct various business such as supermarkets, hotels, liquor, and convenience stores. This company is the largest employer in the private sector and employed almost 22000 employees in its premises. Shareholders base of this company is also strong as it includes almost 530,000 (Wesfarmers, n.d.).
The main aim of Wesfarmers is to ensure satisfactory return to their shareholders and company achieve this aim by ensuring effective and efficient management of financial operations and the other operations of the business conducted by the company.
Wesfarmers consider the accurate management of every business operated by the organization and company ensure this developing appropriate strategy and by executing the same in effective manner. Board of directors and committees of the organization is responsible to take all the decisions of the management and they are responsible to consider all the issues face by the organization (Wesfarmers, n.d.).
As stated above, original model of ABC not only result in difficulties for large scale organization, but it is also complex in nature. This model includes the process related to interviews and survey, which ultimately results in high cost for organization. However, this model is effective for various organizations but it is difficult to maintain and update this model because of the following reasons:
In context of solving these issues, new version of ABC model is introduced and this new version is named as time-driven activity based costing. TDABC is depending on the two factors, and both the factors are stated below:
This model not only ensures effective cost management in the organization but also help the organization in grabbing the cost and profit related opportunities. TDABC has wde scope and different aspects, some of these aspects are defined below:
It helps the management in understanding the cost system in better way by simplifying the things and it also eliminates the unnecessary requirement such as process of interview and survey conduct for allocating cost and resources to the departments and other process. TDABC decrease the unwanted cost and it automatically improves the productivity in the organization. it assign the cost related to resources directly to the objects of cost through the desirable framework, and this framework is based on two parameters which are already defined above (Santana, et al. 2014).
Various aspects of TDABC are already stated above and now this section defines the difference between TDABC and ABC. It also states the difference between TDABC and traditional methods of costing. Difference between all these costing methods is an important topic nad this topic is discussed in detail:
Original model of ABC is the costing technique which is introduced to get rid of the issues created by the traditional methods of costing, and it is used by the management for the purpose of distributing the cost to the consumers and products of the company in various department of the organization. Various organizations are there, especially large scale organizations because of the complex nature this model. Shortcomings of this model lead the experts to develop new model which eliminates the issues related to this model. This model is known as TDABC which deal with all the issues of ABC model. Differences between these two models are stated below:
Under traditional methods of costing management distributes the overheads related to factory to the products on the basis of consumption of product resources. Under this factory overhead is based on the cost of direct labor hours consumed or machine hours used. In this context organizations face various issues such as overhead related to factory is comparatively higher from the allocation and because of this small variation in the resource consumption result in big variation in the applied overhead.
Various organizations engaged in manufacturing use traditional techniques of costing for distributing the overheads related to manufacturing to the units produced by the organization. Organizations which use these types of methods for managing their cost system assume the fact that factors related to volume are the underlying driver of the manufacturing overhead cost and in this manufacturing cost is distributed to the product only. Therefore, it can be said that traditional techniques of costing does not distribute the non-manufacturing cost which is connected with the production.
On the other side, TDABC defines the cost by consider the unit capacity of different resources related to departments and other process of the organization. Under this model, allocation of cost is done on the basis of two parameters that are capacity of resources and required time for conducting any activity. Technique of TDABC is introduced for dealing with the issues created by traditional costing method and adopted by various organizations in the present environment of business. However, traditional methods are not effective if any other process of organization is not running well, but TDABC is effective even when one process of the organization is not working. TDABC model is appropriate for every type of organization and it is most used technique by present business management. Difference between the TDABC and other traditional methods are stated below:
Annual report is published by the Wesfarmers at the end of 2016, and this repot contain all necessary information related to the organization. This report also state various issues addressed by organization during the period of 2016 such as management of the organization mainly consider the way through which they can reduce the cost and effectively manage their cash flow mainly at the time price related to coal are low. Organization states various facts such as possibility to make value in the industrial division and by diversified portfolio of business.
Wesfarmers can meet their goals by adopting the TDABC approach and this also helps them in managing their cost. TDABC not only manage cost system effectively but also create value for the shareholders of the organization (Wesfarmers, 2016). Following are the ways which help the organization through the implementation of TDABC:
Conclusion:
Lastly, it can be said that TDABC is the compulsion need of present working environment and it help the Wesfarmers in different ways by identifying the cost related issues and by managing the cost system of the organization in better way. New version of the ABC model eliminates all the shortcomings of ABC model. This new method of costing decrease the data requirement and mainly include two parameters only that are capacity and cost related to resources and required time for conducting any activity.
References:
Akhavan, S. ward, L. & Bozic, K. (2016). Time-driven Activity-based Costing More Accurately Reflects Costs in Arthroplasty Surgery. Clin Orthop Relat Resv., Volume 474(1).
Hoozie, S. (2014). A comparison of activity-based costing and time-driven activity-based costing. Available at: https://calhoun.nps.edu/bitstream/handle/10945/47751/Hansen-A-Comparison_2014-08.pdf?sequence=1. Accessed on 23rd January 2018.
Kannaiah, D. (2015). Activity Based Costing (ABC): Is It a Tool for Company to Achieve Competitive Advantage?. Available at: https://researchonline.jcu.edu.au/41020/1/41020%20Kannaiah%202015.pdf. Accessed on 11th January 2018.
Kaplan R. & Anderson S. (2007). The innovation of time-driven activity-based costing. Journal of Cost Management.
Kaplan R. & Anderson, S. (2006). The competitive advantage of management accounting. J Manage Account Res 18:127–135.
Kuchta, D. & Troska M. (2007). Activity based costing and customer profitability. Cost Manage 21(3):18–25.
Simple Studies, (2016). A different approach to activity-based costing (ABC). Available at: https://simplestudies.com/different_approach_to_activity_based_costing_abc.html/page/2. Accessed on 23rd January 2018.
Wesfarmers, (2016). 2016 Annual Report. Available at: https://www.wesfarmers.com.au/docs/default-source/reports/2016-annual-report.pdf?sfvrsn=4. Accessed on 23rd January 2018.
Wesfarmers. Our Businesses. Available at: https://www.wesfarmers.com.au/our-businesses/our-businesses. Accessed on 23rd January 2018.
Wesfarmers. Who We Are. Available at: https://www.wesfarmers.com.au/who-we-are/who-we-are. Accessed on 23rd January 2018
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