Activity based costing popularly known as ABC is the system under which all the activities of the firm related to manufacturing of product are recognized and then the indirect costs are allocated to the product (Fathi and Elham 2015). Unlike the traditional cost allocation method that allocates the cost based on the machine hours or labour hours, ABC systems segregates the activities based on the batch level, activity level, product level and sustaining activity of the company. Using the ABC method, the company can gain various advantages like the company can identify the costs that are to be allocated. Further, it helps to measure the activity drivers for allocating the overheads. Further, through this method the entities can focus on the corporate strategies as the costs can be identified in efficient way. The ABC approach can assist the employees to get clear idea regarding various categories of cost and analysing the costs that can be used to add the values. In this way, the entire cost allocation process can be improved which in turn can lead into higher performance (Linassi, Alberton and Marinho 2016). Further, it can contribute to the strategic development along with the better calculations for prices. Though it requires lot of times initially for implementation, once it is implemented, it can be of great use for the entity. Therefore, implementation of the ABC system can be proved as the great opportunity for the company to identify the cost and allocate the overheads to appropriate heads.
|
Activity |
Total activity cost |
Activity driver |
Quantity of activity driver |
Cost per unit of activity |
|
Prepare annual accounts |
$ 5,000.00 |
None available |
||
|
Process receivables |
$ 15,000.00 |
No. of invoices |
5000 |
$ 3.00 |
|
Process payables |
$ 25,000.00 |
No. of purchase orders |
2500 |
$ 10.00 |
|
Program production |
$ 28,000.00 |
No. of production schedules |
1000 |
$ 28.00 |
|
Process sales order |
$ 40,000.00 |
No. of sales orders |
4000 |
$ 10.00 |
|
Dispatch sales order |
$ 30,000.00 |
No. of dispatches |
2500 |
$ 12.00 |
|
Develop and test products |
$ 60,000.00 |
Assigned directly to product |
||
|
Load mixers |
$ 14,050.00 |
No. of batches |
1000 |
$ 14.05 |
|
Operate mixers |
$ 45,900.00 |
No. of kilograms |
200000 |
$ 0.23 |
|
Clean mixers |
$ 6,900.00 |
No. of trays |
1000 |
$ 6.90 |
|
Move mixers to filling |
$ 3,450.00 |
No. of cakes / Pastries |
200000 |
$ 0.02 |
|
Clean trays |
$ 20,000.00 |
No. of trays |
16000 |
$ 1.25 |
|
Fill trays |
$ 16,000.00 |
No. of cakes / Pastries |
800000 |
$ 0.02 |
|
Move to baking |
$ 8,000.00 |
No. of trays |
16000 |
$ 0.50 |
|
Set up ovens |
$ 50,000.00 |
No. of batches |
1000 |
$ 50.00 |
|
Bake cakes / Pastries |
$ 130,000.00 |
No. of batches |
1000 |
$ 130.00 |
|
Move to packing |
$ 40,000.00 |
No. of trays |
16000 |
$ 2.50 |
|
Pack cakes / pastries |
$ 80,000.00 |
No. of cakes / Pastries |
800000 |
$ 0.10 |
|
Inspect pastries |
$ 2,500.00 |
No. of pastries |
50000 |
$ 0.05 |
|
Activity |
Cost per unit of activity |
Annual quantity |
Total cost per activity |
|
Process receivables |
$ 3.00 |
500 |
$ 1,500.00 |
|
Process payables |
$ 10.00 |
200 |
$ 2,000.00 |
|
Program production |
$ 28.00 |
100 |
$ 2,800.00 |
|
Process sales order |
$ 10.00 |
400 |
$ 4,000.00 |
|
Load mixers |
$ 14.05 |
100 |
$ 1,405.00 |
|
Operate mixers |
$ 0.23 |
30000 |
$ 6,885.00 |
|
Clean mixers |
$ 6.90 |
100 |
$ 690.00 |
|
Move mixers to filling |
$ 0.02 |
30000 |
$ 517.50 |
|
Clean trays |
$ 1.25 |
2000 |
$ 2,500.00 |
|
Fill trays |
$ 0.02 |
100000 |
$ 2,000.00 |
|
Move to baking |
$ 0.50 |
2000 |
$ 1,000.00 |
|
Set up ovens |
$ 50.00 |
100 |
$ 5,000.00 |
|
Bake cakes / Pastries |
$ 130.00 |
100 |
$ 13,000.00 |
|
Move to packing |
$ 2.50 |
2000 |
$ 5,000.00 |
|
Pack cakes / pastries |
$ 0.10 |
100000 |
$ 10,000.00 |
|
Dispatch sales order |
$ 12.00 |
500 |
$ 6,000.00 |
|
Develop and test product |
$ 600.00 |
||
|
Total |
$ 64,897.50 |
Other costs that can be considered while calculating the cost of product for Lamington are the operational cost, material cost, labour cost and inspection cost of product.
Budgets are used by the companies for facilitating the control and planning within the company for managing the financial aspects of the business and planning for the expansion of new product. It also assists in the performance evaluation of the companies under the planning process. Budget represents the projection of revenues and expenses for the particular time period. It is started with the assumptions regarding the projected sales and projected expenses. Generally the company 1st prepares the sales budget and thereafter the expenses budgets are prepared. For different departments different budgets are prepared (Lidia 2014). Master budget is prepared based on the size of the firm. The budget generally has 2 parts, the financial budget and the operating budget. The financial budget records the outflows and inflows of cash and other relevant items to state the financial position of the company. The cash outflow and cash inflows are represented through the cash budget. On the other hand, the operating budget records the company’s income generating activities that includes the expenses and revenues.
Two major factors have impact on the cash receipts of HLW that is the annual membership fees and hourly court fees. HLW charges annual membership fees that is direct with fixed fees and are collected annually. Thus the constant and fixed factor is the annual membership fees collected by HLW. On the other hand, the court fees ranges from $ 8 to $ 12 and it is transacted on each day. Total price will also be different as per the difference in time spent, prime time of the day or non-prime time of the day and customer numbers. Therefore, the cash flow generation from the hourly court fees are fixed and cannot be predicted.
With new membership plan the cash receipts can be planned with the improvement in drafting better plan for future and cash flow management and improvement in the eliminating the circumstance of shortages of cash. This can be done as the money received from hourly fees are taken out and the annual membership fees are left with the club (McVay 2015). With implementation of new plan possibilities of cash loss associated with the hourly court fees can be removed. However, the new fee structure will not affect the club’s overall profit. Thus, the new plan implementation will enhance the HLW’s ability to manage the cash.
However, the new structure will not affect the club’s overall profit. However, it may increase the earning of the club with reduction of the financial obligations. Further, with the new plan the cash receipts can be controlled and planned in effective way and with proper planning the management will be able to avoid cash shortages so that the short-term obligations can be met efficiently (Guerrero-Baena, Gómez-Limón and Fruet Cardozo 2013). Therefore, with the new fee structure, the club will be able to manage therir cash efficiently and meet their financial obligation comfortably.
|
Receipts from the membership fees |
|
|
Particulars |
Amount |
|
Individual |
$ 22,500.00 |
|
Student |
$ 15,000.00 |
|
Family |
$ 100,000.00 |
|
Total |
$ 137,500.00 |
|
Receipts from court fees |
|
|
Particulars |
Amount |
|
Prime time |
$ 86,400.00 |
|
Non-prime time |
$ 56,000.00 |
|
Off season |
$ 21,600.00 |
|
Total |
$ 164,000.00 |
Total receipts from 2 sources of fees = ($ 137,500 + $ 164, 000) = $ 301,500.
Computation of receipts after new plan implementation –
New members = (2000 / 70%) = 1400 members
|
Under the campaign |
|
|
Particulars |
Amount |
|
Family |
$ 141,750.00 |
|
Individual |
$ 78,750.00 |
|
Total |
$ 220,500.00 |
|
Receipts in case of no campaign |
|
|
Particulars |
Amount |
|
Family |
$ 192,500.00 |
|
Individual |
$ 115,500.00 |
|
Total |
$ 308,000.00 |
|
Total receipts under new plan implementation |
|
|
Particulars |
Amount |
|
Under campaign |
$ 220,500.00 |
|
Under no-campaign |
$ 308,000.00 |
|
Total receipts |
$ 528,500.00 |
Thus, changing the plan in collecting the fees or new membership plan will be effective and positive with regard to the processing and will result in increasing the revenue as it will generate incremental revenue amounting to ($ 528,500 – $ 301,500) = $ 227,000
For adopting or rejecting the project, major factors recognized by HLW are as follows –
Management can recognize the reduction in administration cost if the new membership plan is implemented as the preparation of regular record for collecting the revenue will not be required. Various issues may be faced by the company initially after new plan implementation as the payments will be received by the management for the membership (Weygandt, Kimmel and Kieso 2015). Moreover, onetime advance payments will adversely affect the number of members. The management also recognised the importance of preparing the budget for achieving the goals. They also prepare the cash flow statement to manage and control the available liquid funds.
For gaining complete understanding of the new plan HLW carried out various evaluations in financial aspects. For instance, they must compute the liquidity ratio to analyse the liquidity status and make the efficient use of the working capital. HLW shall also prepare and evaluate the cash flow statement to analyse and keep track of cash outflows and cash inflows. The company may prepare the cash budget for proper utilization of their cash balances however, adequate cash shall be there to meet the short-term obligation and maintain the liquidity. Moreover, preparing the budget can help the management of HLW to fix their target and compare the achievement with the target.
Conclusion
It is concluded from the above discussion that the ABC systems segregates the activities based on the batch level, activity level, product level and sustaining activity of the company and assists in proper allocation of overheads. On the other hand, budget represents the projection of revenues and expenses for the particular time period. With new membership plan of HLW, the cash receipts can be planned with the improvement in drafting better plan for future cash flow. Though the new fee structure will not affect the club’s overall profit, it will enhance the HLW’s ability to manage the cash.
Reference
Fathi, Z. and Elham Sadat M. D. 2015, A survey of activity-based costing in hotel industry, Management Science Letters, vol. 5, no. 9, pp. 855-860.
Guerrero-Baena, M.D., Gómez-Limón, J.A. and Fruet Cardozo, J.V. 2013, “The capital budgeting process: A methodological approach based on financial and intellectual value creation”, Intangible Capital, vol. 9, no. 4.
Lidia, T.G. 2014, Difficulties of the Budgeting Process and Factors Leading to the Decision to Implement this Management Tool, Procedia Economics and Finance, vol. 15, pp. 466-473.
Linassi, R., Alberton, A. & Marinho, S.V. 2016, “Menu engineering and activity-based costing: An improved method of menu planning”, International Journal of Contemporary Hospitality Management, vol. 28, no. 7, pp. 1417-1440.
McVay, G.J. 2015, “The effects of compensation scheme, source credibility, and receiver involvement on the organizational budgeting process”, Academy of Accounting and Financial Studies Journal, vol. 19, no. 3, pp. 217.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & Managerial Accounting. John Wiley & Sons.
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