Discuss about the Activity Based Costing for Construction Companies.
This report is carried for providing a deep insight into the cost accounting model of Activity Based Analysis (ABC) and its various features. This has been done through carrying out an evaluation of the use of ABC model for attaining the corporate strategies of a company listed on ASX. The company selected in this context is of National Tyre & Wheel Limited (NTD). Also, the recommendations about the implementation of the model and other management accounting tool suitable to be applied within the company are discussed in the report.
For the measurement of the overhead cost, one of the tools which are mostly used by the companies and business organisations is ABC better known as activity based costing. By using ABC tool, the business organisations measure the overhead cost as well as the several other costs which are related to the business operations. The ABC approach is based upon the cost of the products that is incurred while the companies undertook its business operations ranging from manufacturing to finishing. Whenever the business organisation carries on with its production there is a sort of cost which is added in every next step in the total cost of the production. Therefore, to manage these added cost and the overhead cost; the companies started taking use of the ABC tool (Wagener, 2008). Another aspect by which activity based costing can be understood is the financial cost allocation. For achieving higher production and improved performance with the minimum use of organisational resources and low cost, there is used ABC tool so that there can be maintained an effective track of the activities and costs which are related to the product and production. There are various activities in which the ABC tool is used in the business organisation such as for the development of the products for the manufacturing of goods for production as well as for identifying the required capital needed for the manufacturing and production functions (Leitner, 2007).
Activity based costing has a number of features or characteristics that help the businesses and the companies in the effective calculation of the overhead cost associated with the final product. There is fixed cost as well as the variable cost which accumulated and resulted in the overhead cost. The variable cost kept on changing according to the business operations and the products. When there is any maintenance cost or the repair cost; the cost is considered as the variable cost. It is also variable in nature because of the quality change as well as the changing requirements of the customer. On the other hand the fixed cost does not change and it remains same for all the production and business operations. It comprises of the cost that is fixed such as the various labour cost, electricity cost, etc. the companies make clear difference between the fixed cost as well as the various cost in the manufacturing unit. When the cost is associated with the product then it is based upon the circumstances where the production takes place as well as the quality of production (Zeuner, 2012). The manufacturing plants are usually there at different units and because of this there is high level of variance that occurs in the cost. There are number of challenges and issues that are associated with the cost and it is essential to understand these issues before the initiation of the production process. The cost relationship issues have a direct impact upon the budget. These issues are related to the changing market needs and the customers’ orders. Thus, it is essential that before the actual calculation of the cost there must be identified and analyses the various factors that can impact the cost. For customer satisfaction as well as for improved production, there is a need that the production team must prepare a chart for all the activities (Goektuerk, 2007).
ABC tool of accounting is highly vital for the business organisations that deal in manufacturing because due to the usage of old and traditional methods, there are extended costs that incurred on final product. The companies use the ABC tool for better decision making and improving performance by taking efficient use of minimum resources and by calculating the overhead cost (Kim, 2017).
National Tyre & Wheel Limited is a tyre and wheel wholesaler company involved in providing tyres and wheel for passenger cars, light commercial vehicles and caravans. The company provides its products across Australia & New Zealand. The company is recognized to meet the tyre replacement needs of thousands of drivers on an annual basis. The company objective is to achieve positive consumer engagement by providing with high quality tyres developed with the use of latest generation technology. The mission of the company is to become a leading brand by development of innovating wheel products having long life, safety and suitability.
The company strategy is to rapidly expand is type and wheel product portfolio and therefore carried out its business operations through subsidiaries and controlled entities. The different subsidiaries of the company pursue growth strategy and strive to introduce new range of products for new market segments and driving the customer loyalty with the use of value-adding services. The company strategy is to develop its wholesaling business for providing tyre products and driving its continued growth by the development of its subsidiaries and controlled entities (National Tyre & Wheel Limited, 2018).
ABC costing model can largely facilitate the company in achievement of its corporate strategies by its effective strategic positioning. The company is aiming to expand its product portfolio for driving its continuous growth and creative positive engagement by providing them high quality products. This can be achieved by the company with the use of ABC costing model that will help NTD in redesigning of its manufacturing process. ABC costing model will enable the company to gain a better understanding of real operational costs and returns and thus supporting the management accountants to take key decisions for improving operational efficiency. The company can review its products for price adjustment with the use of ABC costing model that can lead to identification of the opportunities for reducing operational cost through product redesigning and process improvement. The increase in the operational efficiency will drive significant reduction improve of products and increasing customer satisfaction for the company and thus helping it to attain its corporate strategy (Goektuerk, 2007).
NTD for evolving its product portfolio need to price many type of tyre products in different amounts. Thus, the production of each product will incur varying amount of overhead and thus making it difficult for the management accountant to allocate the overhead cost on individual product basis. In this context, the use of ABC model will provide large help to the management accountants for gaining an accurate estimation of the overhead costs by assigning them to each product manufactured accurately. This is done by the use of developing cost pools and cots drivers that helps in allocating the costs as per the overhead resources consumed in manufacturing process of the company (Kocakula, 2017). Cost drivers are regarded as the factors that determine the number of activities that will be consumed by a given product such as machine hours, size or complexity. The cost incurred in carrying out each activity for the manufacturing of a product can be accurately identified by the management accountants of the company with the use of ABC costing. The actual cost data relating to the products manufactured by the company on the basis of volume of production will assist the management in taking strategic decision regarding the its future growth and expansion plans (Clifton, 2003).
Thus, the use of ABC costing method largely facilitates the business managers of the company to take accurate decisions and therefore it act as a strategic management tool. The decisions relation to elimination of non-value adding products largely helps in improving the operational efficiency by reduction in the overhead costs consumed by the non-valuable products. This can help the company in improving its profitability position and supporting its business strategy of growth and expansion (Ness and Cucuzza, 2005). The strategic decision regarding the product designs, product mix, marketing and product price all requires actual product costing data provided with the use of ABC costing model. Therefore, a better representation of the resources consumed by the activities involved in production of products helps in accurate allocation of the cost to customers on the basis of activity consumed by them. This can enable the company in attaining a competitive edge by creating positive customer engagement through providing them with high quality and low priced products (Kannaiah, 2015). The use of ABC costing model to drive operational efficiency can be depicted as follows:
NTD is recommended to adopt the use of following suggestions for successful implementation of ABC cost accounting system:
The company is also recommended to adopt the use of target costing method in order to accurately determine the cost involves in production of new products by the company. The method is efficient to be used for estimating the overall cost of product life cycle in advance and thus facilitating in making advance plans for price points and margins that the business manager wants to achieve for new product. The approach is largely beneficial for developing the cost goals of a new product to be achieved by the company on the basis of market conditions such as level of competition or switching cost of the customer and many others. It will enable the company to attain a competitive edge by driving to achieve the determined profit margin from each product by the use of suitable cost reduction strategies and actions (Clifton, 2003).
Conclusion
The report concludes that activity based costing model is a highly efficient cost accounting model that enables the management accountants to collect real time cost information for taking accurate strategic decisions. The use of ABC cost accounting model can prove to be highly useful for NTD to realize its growth strategies of business expansion by targeting new customers segments through creation of new tyre and wheel products.
References
Clifton, B. 2003. Target Costing: Market Driven Product Design. CRC Press.
Goektuerk, H. 2007. Activity-Based Costing (ABC) – Advantages and Disadvantages. GRIN Verlag.
Kannaiah, D. 2015. Activity Based Costing (ABC): Is It a Tool for Company to Achieve Competitive Advantage? International Journal of Economics and Finance 7(12), pp. 275-281.
Kim, Y. 2017. Activity Based Costing for Construction Companies. John Wiley & Sons.
Kocakula, M.C. 2017. Activity-Based Costing: Helping Small and Medium-Sized Firms Achieve a Competitive Edge in the Global Marketplace. Department of Accounting and Business.
Leitner, A. 2007. Activity Based Costing. GRIN Verlag.
National Tyre & Wheel Limited. 2018. [Online]. Available at: https://www.ntaw.com.au/companies [Accessed on: 25 May 2018].
Ness, J. and Cucuzza, T. 2005. Tapping the full potential of ABC. [Online]. Available at: https://hbr.org/1995/07/tapping-the-full-potential-of-abc [Accessed on: 25 May 2018].
Wagener, D. 2008. Activity-Based costing and its later development into activity based budgeting and management. GRIN Verlag.
Zeuner, P. 2012. Activity-Based Costing. GRIN Verlag.
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