Discuss about the Activity Based Costing for Equipment Justification Processes.
Many organizations adopt different strategies that are available in the market to efficiently achieve their goal, and for them in to remain competitive, as well as make its overall goals of cost minimization as well as profit Maximization. One of how these organizations can achieve this goal is by adopting the Activity-based costing model.
Through this, Iron Mountain will remain competitive as well as avoid the costs that come along with the different processes and activities as a result of its operations. It can do this by first identifying its key events and linking each activity and process to the cost factors that relate to them. Through this identification, different strategies can be adopted that will help avoid the costly activities and operations or minimize the cost factors accruing to them.
Iron Mountain Incorporation can thus use the ABC model in some ways including Capital Estimation, equipment justification processes, guidance in selecting areas needing improvement, incremental pricing business, make or buy decisions, and be pricing large orders
Despite its weaknesses, the model proves to be the best accounting strategy that different organizations including Iron Mountain Incorporation can adopt to help them achieve their overall objectives as well as implement its corporate plan.
This model concentrate on the determination of accurate cost information to help the organization to make decisions that are critical to the organization based on the available information on product costs. The Costs of overhead can be apportioned in many ways resulting in some different prices for the similar product (Grant 2013). The main aim is to determine a system of apportionment that effectively estimates the resultant costs of the overhead of every commodity. Different options can be applied in the distribution of overhead costs.
This model uses numerous cost pools that are arranged by activity, to assign costs of overhead. The basic idea is that the events are needed for the creation of products. Since the resulting activities are mostly expensive, the value of operations should be apportioned to goods or services based on how the activities consumed the products (Kriemler et al. 2011).
This model act as a tool that can be used by the management for the accurate allocation of indirect costs to the activities that uses it. It involves tracing resource utilization and final costing outputs. Under this concept, resources are apportioned to, and the activities are assigned to cost objects (Donnelly and Lambourne 2011). It is best applicable in complex environments, where it is possible to offer different advantages, for instance: Accurately providing a favorable costing method of products and services, helping wrong pricing decisions through available cost information. The approach also assists in presenting more detailed and accurate information to managers hence helping them understand cost drivers and product overheads (Govindan, Khodaverdi and Jafarian 2013).
Activity-based costing model can also assist in the estimation of the cost of services as well as products through allocating costs of overhead to direct costs. It attributes the costs of every activity in the institution to all services and products according to the number of resources used by services or product on the activities performs by the organization (Macal and North 2010).
For an organization to fully benefit from this process, it has to adopt the following critical steps: Analyzing the key activities, collecting Cost data, tracing the costs to businesses, establishing the prices of outputs, and performing analysis on costs.
The actual process of transforming costing systems of the business from old costing systems used by the firms to Activity-based costing systems relies on many critical factors: Managing change, continuous training and education of staff, cultural support, and acceptance and goodwill of the management of teams by Executive.
The primary disadvantages that come along with the adoption of the ABC model include the following elements: The implementation method is complicated, time-consuming, and expensive, the data entry and collection process needs a significant amount of resources as compared to the traditional model, and it is costly to maintain after its implementation.
The purpose of the organization is to trust guardians of the assets and information of its customers, it works together with all of its customers for managing the risks and complexity of in the present day as well as in the future by protecting, and understanding their customers. They also focus on transforming the matters that need more consideration from their customers. The organization, therefore, will always strive to ensure that their day to day business activities is aimed at providing customer satisfaction as well as ensuring minimized costs while achieving this goal (Paradise 2017). Through this, the value will be added as a result of the continued customer satisfaction hence increasing profitability.
For the management to achieve its long-term goal, iron mountain incorporation aims at achieving the following objectives: Helping those who use their products to lower the cost of storage, complying with rules, managing risks, as well as using the cost information to facilitate their growth.
To effectively achieve these objectives, it has adequately put in place the following measures, asset storage, and information, data management, secure shredding and records management.
The organization can, therefore, adopt the ABC model which could help it effectively and efficiently allocate costs within the organization, hence helping it minimize on the probable costs as well as attain its objectives (Idoughi, Kerkar and Kolski 2010).
For the Iron Mountain Incorporation to remain competitive in the competitive market environment, the company has taken a different approach that will help it decrease the costs that it would incur as well as increase its revenue streams over a period. To effectively achieve this, Iron Mountain Incorporation treats assets and information of their clients in a welcoming manner. The following are the strategies adopted by the company: Continuously investing in technology that deals with security, conducting related checks on the workers and providing adequate training on a need basis, and encouraging outside side security audits to improve their security values (Fritsch and Kauffeld 2010).
By fully adopting and implementing these strategies, Iron Mountain Incorporation would thus fully come up with strict rules for the industry to help them secure their data privacy as well as information. This, in turn, helps minimize costs that may arise as a result of inadequate standards set for data storage.
Through an effective adoption of the Activity-based costing, the organization can effectively perform its approach in different ways, including facilitating the process of cost efficiency through the provision of more accurate and relevant information on the activities that Iron Mountain Inc. participated. This thus leads to an abrupt reduction in costs as well as cost management (Bitektine 2011). The control of Iron Mountain Inc. can also use this accounting tool to improve and facilitate the processes of decision making in the organization since decision making is a critical aspect to the organization, which can help it achieve its corporate goals and implement its strategies. These decisions can include decisions about the cost factors of the organization and how they can effectively manage it (Chen and Lou 2013). Through this approach, the organization will easily measure and quantify the real activity costs in every department, thus assisting the firm to remain focused on identifying the correlation between the means of performing activities and the prices. A good understanding of the costs elements is an essential factor since it helps the firm to estimate its profitability and the performance in the area of specialization (Damanpour and Aravind 2012). Costing can assist the organization in solving particular issues in any department within the organization or support decision making at the department level. Iron Mountain Inc. can thus apply the use of Activity-based costing in its various departments where there exist many units of service with each having small cost/unit. By adopting this strategy, the organization will be able to identify inefficient departments, activities, and products and then come up with ways of improving those areas (Salamin and Vinciarelli 2012). The Activity-based costing will ensure that the organization produces exact unit costs of all the services, hence helping it to deliver its strategies in that it will enhance transparency and efficiency in the hospital. Most of their customers will thus seek for their services, therefore, increasing the return of the organization. With the improvement of the efficiency and costing system, the management will ensure that quality services are delivered to its consumers (Hugg et al. 2010). The model will also enable the administration to balance and use the available but scarce resources, therefore, allowing it to cut on most of the costs.
ABC model is an essential strategy that most organizations can adopt and develop since it allows for the continuous growth of the organization and improve its overall performance. This will, in turn, help it gain a competitive advantage over its available competitors in the market (Chai, Liu and Ngai 2013).
Recommendations to Iron Mountain Inc. on the adoption and implementation of the ABC model
By adopting the ABC model, Iron Mountain Inc. will accrue a lot of benefits which includes providing: advance method of costing services and products, the correct decision on price, as well as more accurate information on how to find out product overhead and cost drivers by managers (Vakkayil 2010).
It will also help estimate services and products costs by allocating costs of overhead to direct costs. It also attributes the activity costs in the institution to the entire services and products which are based on the use of activity resource by the commodities (Zimmerman and Yahya 2011).
According to the analysis, the best accounting tool that can be approved by the organization is the cost of quality technique since it effectively helps classify the activities as well as identify the costs that relate to those activities (Wiggers, Boer and Kok 2012) This will also help improve the product value in its chain of operations. As a result, the organizations business processes will be developed as well since it highlights the significance of using precise information on costs for decision making (Tehrani, Mehragan and Golkani 2012).
Conclusion
The ABC model is essential to organizations since it can enable the institution to accurately assign costs to particular activities thereby helping them to improve decision making. Since decision making is critical to any organization, the ABC model will effectively provide useful information to aid it thus enabling it to achieve its strategic goals. The management should, therefore, focus their attention on improving the measurement of unit costs since it will allow transparency within the organization as well as improving the performance of each department within it. The paper also discusses the benefits that are associated with the use of the Activity-based system in the institution. One of the significant benefits that the organization will get by using the approach is that it will increase the performance and the profitability of the firm. The management can as well consider applying other accounting tools that can help complement the ABC model hence helping to improve the performance of the organization.
References
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