Discuss about the ABC Model Implementation in Companies.
Activity Based Costing (ABC) is a method of accountancy which determines the relationship of consumed resources, the product and the cost incurred in the same to recognize the cost of accurately for each activity (Al-Hroot, Saadaaan and Amireh 2015). In simple words, this method enhances the costing of the product by providing it more accuracy in comparison to the traditional techniques. It also provides assistance to the managers in understanding the allocation as usage of resources in order to help them strategies competitively. It is observed that various organizations have been prioritizing this method by implementing it so as to gain a competitive edge by reducing the cost. Moreover, it also provides decision support to the decision makers when other cost system fail to do the needful.
Wesfarmers is considered to be one of the most valued organizations which is headquartered in Australia and is listed under Australian Stock Exchange (ASX). With its enormous business line, Wesfarmers operates in various fields starting from supermarkets, liquor outlets, hotels to another industry such as chemicals & fertilizers, energy and even coal mining (Allain and Laurin 2018). Hence, with so many heads of business, Wesfarmers becomes one of the most diverse companies which could implement activity-based costing and this paper will identify the gaps which Wesfarmers could fill using the aforementioned costing method.
Currently, there has been a desire amongst the organizations to understand their cost and the key influencers of the same. However, a confusion remains with them on how to understand the costs and differentiation among the various costs which the organization incurs during various operations (Al-Nuaimi, Mohamed and Alekam 2017). Hence, this makes difficult for the managers as well as the accountants to keep an accurate track of the costs.
It has been witnessed in a past few years that the activity-based costing method has been adopted by various firms and is even common among the management accounting techniques. It is generally used where the organization has diversified range of products as well as various operations. In such plants, the accuracy of deriving cost is much difficult than that of others. In such organizations some of the products are under costed while other are over-costed (Angelopoulos and Pollalis 2017).
With the business environment becoming more competitive with the technological advancement, the companies try their best to manage their costs. With the traditional methods, the chances of accuracy were minimal which could be misleading and make decision making process difficult for managers. Though simple, the traditional method failed to identify the indirect costs with accuracy. Hence, with the introduction of activity-based cost method, all the expenses of an organization be it direct or indirect is acquired (Yang and Chang 2018).
Wesfarmers, being a conglomerate, deals with various business lines in Australian and New Zealand majorly. The company aims towards being best at ethical practices within the its business operations and to its stakeholders. Being a reputed firm, it has a mission to enhance its standards to both of its stakeholders and customers (Arora and Raju 2017). Other than maintaining high standard of ethics in the organization, the company also aims to ensure satisfactory returns to its investors and wealth maximization of its stakeholders. The organization has also reflected its responsibility towards environmental and social development. Moreover, it also aims towards the development of the economy and its major contribution in the same.
Financially, the company’s primary objective is to provide the shareholders with true and fair value of the firm for which the organization is looking forward to improve the culture of the workplace. This corporate structure is aimed to be implemented throughout the various branches of the organization be it within or outside the national boundaries. High level of information as well as transparency is again within the objectives of Wesfarmers (Oseifuah 2018). Even the employees of the organization are instructed to strictly follow the business ethics during execution of their duty.
The company tries to maintain the best product quality so as to keep their customer satisfied and even ensures that the customer gets the correct information about any Wesfarmers product they use. The primary objective of the company also includes the its sustainable development along with that of the society. It has moreover aimed to invest towards technological advancements in order to remain competitive as well as allocate their resources successfully. The company believes in value creation and brand upliftment which is possible through creation of wealth while keeping its ethical norms intact. Hence, they have developed several CSR strategies which includes the well being of all the stakeholders (Smith, Burt and Gentile 2017).
The company’s core strategy is to provide the shareholders with satisfactory returns or in other words maximizing their value. The organization’s core values revolve around integrity, openness, accountability as well as boldness. The company acts ethically towards every dealings as well as transactions made. It also keeps its transparency while reporting the financial statements and even take feedback and ideas seriously. Accepting the mistakes made and learning from the same is within its values. Wesfarmers own the accountability of any decisions made and work towards enhancing its performance to protect its reputation (Dale and Plunkett 2017).
Wesfarmers believe in providing autonomy to its business operations so that the particular unit may operate efficiently. They do not remain within some rigid strategy and implements plans as needed. The first growth enabler of the organization is hiring the unique talent and utilizing them towards the most critical works so as to strive while being sustainable. It recognizes the abilities of its employees (Tsai et al. 2015). The company also work towards promoting the commercial capability throughout the leadership base. Hence, it ensures the any decision made by the company is backed by capable financial discipline. Moreover. they constantly work towards enhancing their corporate culture and encourages innovation as well as creativity. The organization maintains high level of social responsibility and they do same with their balance sheet in order to remain competitive in their costing and always store capital for any opportunities which might be a tool for value creation (Lueg and Morratz 2017).
The group’s strategies to gain its objectives is to strengthen the operational excellence in the current business and carter to the needs of the customers. It also encourages the entrepreneurial initiatives with secure growth and even ensure stability. Moreover, the organization also renews it portfolio by injecting value-added transaction into its operations.
A better understanding of cost could be essential for creating an effective strategy for the corporation. As ABC model refines the costing, it also keeps track of individual objects which incurs cost for the organization. As per the common belief, the accountants think that inventory cost will provide all the cost but it does not, so ABC method provides the true cost (Arora and Raju 2017). The core benefit of this method is that it allocates the indirect cost to calculate the total expenses. In the traditional method, the direct cost is traced to the main product but the manufacturing overhead is not traced although and is allocated towards the product. Hence, the inability to trace the actual cost, there remains an error. In simple words the new method actually traces the costs directly at the product and finds exact cost which is helpful as well as reliable in making decisions.
This method of costing could help the organization from wasting its resources on the activities which does not add any value and assist the managers to identify the profitable projects. The cost accounting system mainly satisfies three goals which includes allocation of various costs so as to create the financial statement, providing information to cost managers and providing cost estimates.
However, in Wesfarmers the activity-based costing could reflect its various other functions as this company is into diversified fields (Manyaeva, Piskunov and Fomin 2016). Such functions could be satisfaction of customers by enhancing the pricing system and even limit the price-cutting to keep it profitable parallelly. It can also help the management to identify the most profitable goods and those which are unprofitable. In this the company could organize its strategy as per the goods and the target market. The activity-based costing could also help the organization to manage their inventory efficiently and achieve better turnover rate through proper valuation of the same. Wesfarmers could also make their various processes and departments efficient when they have a better understanding of cost of operating those processes. It may even help in differentiating the cost of production from that of idleness and finally to assimilate effectively with the financial accounts (Neto et al. 2018).
Implementing the ABC model in Wesfarmers would need adequate support from the top management of the company. As this model is to be implemented, it is necessary to be included in core values. The whole costing process is needed to be changed and the department responsible for working in the same are needed to be trained to acquire this method. Hence, it is important that the structure of the company to absorb the ABC design (Öker and Ad?güzel 2016). Therefore, it is needed to be implemented throughout the cross-functional team rather than one particular accounting department. This is possible if the organization forms a special team comprised of people from each and every department from various business operations so as to train them to use the date that is generated from activity-based costing model. This team would be comprised of the representative from every business operation’s various departments. Hence, a consultant for the same is needed to be hired to take advice from.
The reason for which Wesfarmers should support the implement the same is because the managers needs reflect resistant towards any change without the lack of leadership from senior management. Moreover, without proper support, the significance of ABC model might detriment in eyes of the subordinate (Chouhan, Soral and Chandra 2017). Hence, it can be recommended that management of Wesfarmers should understand their cost accounting system implement the method and involve cross-functional teams to allocate the cost in each department of every business operations. Hence, it would be helpful for the organization towards using the model for the preparation of eternal financial reports.
Another tool that could be effective for the management accounting of Wesfarmers is budgetary control. This tool is of significance because of its contribution towards planning and controlling of various activities at different organizational levels (Angelopoulos 2017). It has been observed that managers estimate their budgets very seriously as it will help them to determine the actual position of the organizations cost levels and will assist them in taking important decision. There are various benefits which Wesfarmers could derive through implementation of budgetary control such as:
Conclusion
Evaluating the article above could help in identifying the assistance provided by ABC model in differentiating the cost in two main categories of fixed and variable so as to provide a quality information in order to design a cost-effective system in the organization. Wesfarmers has an aim of maintaining a competitive edge over its rivals while maintain the ethical standards. Hence, ABC model hold a significance in identifying the less income generating department or operations and take necessary steps to manage the same. Moreover, another management tool which the company could implement is budgetary control as it helps the management to recognize actual budget’s variances. Therefore, counteractive actions could be implemented to curb the errors in the external reports.
References
Al-Hroot, Y.A.K., Saadat, A.A.D.M.M. and Amireh, L., 2015. The Effectof Activity-Based Costing on Companies Financial Performance: A Study among Jordanian Industrial Shareholding Companies. Analysis, 7(35).
Allain, E. and Laurin, C., 2018. Explaining implementation difficulties associated with activity-based costing through system uses. Journal of Applied Accounting Research, (just-accepted), pp.00-00.
Al-Nuaimi, S.I.M., Mohamed, R. and Alekam, J.M.E., 2017. The Link between Information Technology, Activity-based Costing Implementation and Organizational Performance. International Review of Management and Marketing, 7(1).
Angelopoulos, M. and Pollalis, Y., 2017. Activity Based Costing (ABC) as a tool for Lean Transformation: The Case of the Greek Power Public Corporation (PPC).
Angelopoulos, M. 2017. Using ABC costing method with in a KPI-based framework to a Lean transformation of a Greek Public Company.
Arora, A.K. and Raju, M.S.S., 2017. The Effect of Firm’s Size on the Adoption and Implementation of Activity Based Costing. Splint International Journal of Professionals, 4(7), pp.36-40.
Chouhan, V., Soral, G. and Chandra, B., 2017. Activity based costing model for inventory valuation. Management Science Letters, 7(3), pp.135-144.
Dale, B.G. and Plunkett, J.J., 2017. Quality costing. Routledge.
Lueg, R. and Morratz, H., 2017. Understanding the error-structure of Time-driven Activity-based Costing: A pilot implementation at a European manufacturing company. European Journal of Management, 17(1), pp.49-56.
Manyaeva, V., Piskunov, V. and Fomin, V., 2016. Strategic Management Accounting of Company Costs.
Neto, M., Feitoza, H., Agostinho, F., Almeida, C.M., Moreno García, R.R. and Giannetti, B.F., 2018. Activity-based costing using multicriteria drivers: an accounting proposal to boost companies toward sustainability. Frontiers in Energy Research, 6, p.36.
Öker, F. and Ad?güzel, H., 2016. Time?driven activity?based costing: An implementation in a manufacturing company. Journal of Corporate Accounting & Finance, 27(3), pp.39-56.
Oseifuah, E.K., 2018. Activity based costing (ABC) in the public sector: benefits and challenges. Management, 12, pp.4-2.
Smith, J., Burt, I. and Gentile, M., 2017. Activity Based Costing in Intercollegiate Athletic Departments: Is There Value in Using It?.
Tsai, W.H., Tsaur, T.S., Chou, Y.W., Liu, J.Y., Hsu, J.L. and Hsieh, C.L., 2015. Integrating the activity-based costing system and life-cycle assessment into green decision-making. International Journal of Production Research, 53(2), pp.451-465.
Yang, K.M. and Chang, S.H., 2018. Application of Activity-Based Costing to Green Industry for Profitability and Performance Enhancement-Recycling of Blast Furnace Slag as an Example. Advances in Management and Applied Economics, 8(3), pp.27-59.
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