Activity Based Costing Organizations: Usefulness, Adoption, And Challenges

Usefulness of ABC

Discuss about the Activity Based Costing Organizations.

ABC is an effective accounting tool for manufacturing organizations. The costing methodology that identifies organizational activities and assigns the cost of each activity is known as Activity-based Costing (ABC). This methodology is used to help the organization in reaching the true cost and profitability by improving costing accuracy (Kannaiah, 2015). In today’s advanced competitive and manufacturing environment, exact costing knowledge is vital for all the kinds of businesses, such as merchandizing firms, manufacturing firms, and service firms (Fei & Isa, 2010). ABC has progressively fascinated the attention of researchers and practitioners as one of the strategic tools that help managers for better decision-making. Asia-Pacific region is a developing section of the world attracting manufacturing units from all over the world.  ABC provides vital business intelligence which makes it a much-needed accounting tool for the manufacturing organizations. However, despite its merits, ABC is not termed as a very popular option adopted by many organizations (Askarany, 2016). The essay critically evaluates the usefulness of ABC in modern manufacturing organizations in the Asia Pacific region.

Use of ABC as an accounting system in a manufacturing organization is one of the most attractive topics for researchers. As Davood Askarany says that researches on the capability, adoption, usefulness, and diffusion of ABC as a solution to overcome the lacking of traditional cost and management accounting practices in its efficiency and capability, has been an interesting topic from last three decades. Especially, in the developing countries like Oman ABC is catching interest of the managers (Askarany, 2016).  Many researchers and practitioners emphasizes on using the new cost system like ABC. Like Cardos & Pete says that ABC permits better tracing of object cost, financial and non-financial analysis, superior allocation of overheads to costs of objects, and measures that are useful to management and managers in the decision-making process (Cardos & Pete, 2011). Still many organizations after adopting ABC system is not able to gain from it. Fei and Isa have given a suggestion in their research paper that many organizations fail to gain success from ABC due to the different contextual factors faced by each organization (Fei & Isa, 2010). It is important to understand the factors affecting the organization and then the implementation of the accounting system will be a success.

The ABC accounting system can be termed as a blessing for many organizations as it brought not only success through profits but enhanced and supported the decision taking methods of organization (Fang & Ng, 2011). But it is a lot of time to reach the objectives of the company. To support it, an example of a Chinese company Xu Ji is given here. In 2003, Xu Ji adopted ABC which helped in decreasing the large amount of manual book keeping work. It helped the company in surviving China’s free market competition which was not possible with an inaccurate traditional accounting system that the company was following till 2003. It successfully traced the direct labor costs to client contract and product and allocated manufacturing overheads by current direct labor hours. By 2010, the ABC system was effectively implemented and resulted in an increase of record annual sales of 50% and 13% of profit margin (Liu & Pan, 2011). This was a very long wait for the company to reach the profit expected to be earned by it. Hence, using ABC was a decision that cost the company a lot of time in which a number of changes happened. This is the reason that many companies discontinue the use of ABC system after implementing it.

Challenges for Adoption and Implementation of ABC

ABC is a vital tool for increasing the bottom line and top line the same time. ABC enables to set competitive pricing which is very important in the competitive market of Asia-Pacific region (Kannaiah, 2015). It allows companies to review its products for the adjustment of price and reveal the opportunities to decrease the cost via continuous process improvement and better product designing. But there is a strong reason why it is not benefiting all the companies, and that is the change of factors affecting the market of the country. For example, Blue Cross and Blue Shield Company of Florida faced an increasingly complex and competitive market place in the healthcare manufacturing market. To stand in the competition, management adopted ABC with the aim of “The cost for Pricing” project which meant to radically look at the cost structure of the company and coming up with a competitive pricing. The cost of pricing provided the strategic activity cost information and were designed to be flexible and were able to identify the opportunities of the market and operating issues (Kannaiah, 2015). The information generated via ABC system increased the confidence of manager in coating the product’s prices as it was more competitive than before. This increased the competitive advantage of the organization but was not a success in the long run as the company failed to implement it with the same zeal as the market grow (Banker, Bardhan, & Chen, 2008).

The other reason for adopting ABC system for accounting is the criticizing of the traditional costing techniques. The traditional costing techniques are taken as inefficacious for the organizational operations in an era of quickly changing global and technological competition (Coners, 2007). But there are many factors that do not allow it to be used effectively.  As a study was taken up by Mr. Sengphanich on Thai manufacturing firms, state that many Thai firms has adopted ABC system to improve their operation as it is an efficient management tool (Sengphanich, 2007). The study shows that about 25% of Thai manufacturing organizations have adopted ABC. 20.6% are evaluating it as an option and 1.65% has adopted ABC, but has abandoned it and 47.8% did not even consider it as an option (Sengphanich, 2007). This shows that even if peers think ABC as a great option to be used still manufacturing organizations are not considering it for adoption.

There are many merits in the ABC accounting tool that favors the manufacturing organizations of the Asia-Pacific region but, still, the adoption rate of is not as high as expected. Also, many firms have abandoned it after the implementation. The factors that stop a firm to adopt ABC as the accounting tool of the company or discontinue it after implementing are considered here to evaluate the usefulness of the accounting system (Charles & Hansen, 2008). As per the studies conducted the major flaw of ABC accounting system the difficulties an organization faces with the complexity of the implementation of the system. There is a general lack of knowledge and expertise about the ABC accounting system as it is a modern technique. The high cost of the implementation of the accounting system increases the costing for the manufacturers which discourages them in adopting the system (Carnegie & Napier, 2010).

Conclusion

As, Asia-Pacific region comprises mainly of developing countries the number of small manufacturers is more which makes it more difficult more them to adopt and bear the implementation cost of the accounting system. ABC is a whole new process that is needed to be learned by the managerial department which increases the amount of work for them (Cardos & Pete, 2011). This makes it a time-consuming process as it needed to be integrated with the existing accounting system. ABC is not very clear in people’s mind. They are still uncertain about the benefits of ABC, and thus, are reluctant to adopt as the accounting system for their firms. Lastly, people living in Asia-Pacific region are very much attached to their traditional ways which make them a difficult people to adopt the changes that ABC brings in the accounting system as well as in the costing structure of the organization. All these points decrease or hide the usefulness of the accounting tool and act as the critical catalyst that are coercing organizations to discontinue ABC implementation (Bushong, Talbott, & Cornell, 2008).

Conclusion

ABC accounting tool is one of the most popular costing methods that overcomes the lacking of traditional accounting system and gets more accurate and reliable cost information that produces the true cost of each activity taking place during manufacturing. Asia-Pacific region is acting as a core for manufacturing unit set-up and acts as a best place to analyse the usefulness of the ABC system. Manufacturing units those who have adopted ABC as their accounting tool are enjoying its benefits and standing efficiently in today’s competitive market. Even it is a very popular accounting tool still, ABC has not reached the level of acceptance as expected, but there are no reasons that can act as a major flaw in the ABC accounting system. As shown in the studies mentioned above, ABC is developing as a useful tool for the manufacturing units not only in terms of cost benefits, but as a support to managers in the decision-making. With the increasing modern approach in the manufacturing business a more defined and refined accounting tool is required by the organization to stand against the competition of the global market which traditional accounting tools are not able to provide. People need a better understanding of the tool to implement it and take its benefits. Hence, the essay concludes that ABC is an effective and useful accounting tool for the manufacturing units in the Asia-Pacific region that can be used to get the accurate cost of all the activities of the organization but more awareness and certainty is required to make it approachable and acceptable.

References

Askarany, D. (2016). Attributes of Innovation and Management Accounting Changes. Contemporary Management Research, 12(4).

Banker, R., Bardhan, I., & Chen, T. (2008). The role of manufacturing practices in mediating the impact of activity-based costing on plant performance. Accounting, Organizations And Society, 33(1), 1-19.

Bushong, J., Talbott, J., & Cornell, D. (2008). Instructional Case—Activity-based Costing Incorporating both Activity and Product Costing. Accounting Education, 17(4), 385-403.

Cardos, I. & Pete, S. (2011). Activity-based Costing (ABC) and Activitybased Management (ABM) Implementation – Is This the Solution for Organizations to Gain Profitability? (1st ed.). Romania: Babes-Bolyai University.

Carnegie, G. & Napier, C. (2010). Traditional accountants and business professionals: Portraying the accounting profession after Enron. Accounting, Organizations And Society, 35(3), 360-376.

Charles, S. & Hansen, D. (2008). An evaluation of activity-based costing and functional-based costing: A game-theoretic approach. International Journal Of Production Economics, 113(1), 282-296.

Coners, A. (2007). Time-Driven Activity-Based Costing. Controlling, 19(6), 343-346.

Fang, Y. & Ng, S. (2011). Applying activity?based costing approach for construction logistics cost analysis. Construction Innovation, 11(3), 259-281.

Fei, Z. & Isa, C. (2010). Factors Influencing Activity-Based Costing Success: A Research Framework. International Journal Of Trade, Economics And Finance, 1(2), 144-150.

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), 275.

Liu, L. & Pan, F. (2011). Activity-based costing in China: a case study of Xu Ji Electric Co. Ltd (1st ed., pp. Volume 7 Issue 13). China: CIMA.

Sengphanich, U. (2007). The Characteristics of the activity-based costing practice in Thai manufacturing firms (1st ed.). Australia: University of South Australia.