Discuss about the Activity Based Costing for Managerial Accounting.
This report deals with a deep insight into the practical aspects of manufacturing concerns, with respect to the implementation and the usage of the famous managerial accounting tool, Activity based Costing, or the ABC costing method. This method is relatively very young managerial method and off late it has been adopted by numerous manufacturing concerns all around the world. Although the method was developed a long time ago during the 1980s, by George Staubas, in the US manufacturing sectors. Since then, it has gained importance and is now being increasingly used, based on its popularity of providing accurate results. In this report, the implementation of the ABC, in the context of the famous Australian Ship manufacturing company Austal Ships has been made. It is one of the largest ship building and defence companies around the world, and the largest one in Australia (Austal: Corporate, 2018). The project report deals with the various kinds of intricacies involved in the method of ABC costing along with various recommendations regarding its implementation and the different alternatives available.
Activity based costing is one of the most novel concepts of the subject of Managerial Accounting. It is a method as defined by CIMA, (Chartered Institute of Management Accountants) as the process of allocating costs on the basis of the benefit received from the different kinds of the indirect activities. This refers to ordering, setting up projects, quality assurance etc. It has also been defined as the collection of the different kinds of financial and operating performance information tracing the imperative activities of the company to its product costs. The basic premise of this procedure is the fact that it is focused and is entirely based on the activities as the ultimate and the most fundamental cost objects. It uses these activities as the basis of calculating the costs of the various goods and services produced by concerned business organisation (Hilton and Platt, 2013). The basic idea behind this method of cost allocation is the fact that this method is more involved with the allocation of indirect costs to the products which are produced by the company, rather than the direct ones (Mahal and Hossain., 2015). The majority of these costs are allocated on the basis of some specific cost drivers, which exerts some significant amount of influence on the allocation procedures.
The most prominent features of Activity based costing are as follows:
Austal Ships is an Australian based global ship manufacturing company and a prime time defence contractor. In addition to the production of the defence ships, it also engages in the production of the commercial ship vessels. Austal’s product ranges from naval vessels, high speed passenger ferries, speciality utility vehicles and crew transfer vessels (Austal: Corporate, 2018). Austal’s main objective is to infuse major advanced technological inventions into the company’s ships, as a result of which the company is very much concerned with its objective of building a ‘smart ship’ control systems and setting up of a ‘digital shipyard’. As a result of which, the company would achieve major success by adopting ABC, as it matches with its innate objectives of building such advanced ships and systems.
Austal’s most important strategy is to deliver world class ships not only in the defence sector but also in the sector of commercial ship building by using the latest technologies. In doing so the company’s management’s aim is to ensure that a steady supply of cash flow is provided to all the shareholders of the company. The most significant ways of delivering these strategies include, dynamic participation of the senior management in order to improve and increase the company’s overall performance and efficiency. The company primary strategy remains to outperform the rivals in the production as well as the overall quality of the different commercial as well as the defence ships. The company extensive product range from passenger ferries, patrol boats, high speed support vessels, worldwide maintenance service facilities bears a strong testimony to the fact that the company strategy of global marine vessel domination. By doing all these operations, the company wants to provide an exemplary behaviour in the world market. It urges all its employees all over the world, to function with the same level of competitiveness and provide the rightful quality expected of any Austal product. ABC costing helps in achieving the same by providing the platform for exercising the above mentioned strategies and objectives of the Austal.
The implementation of the ABC model in the manufacturing concern, especially in the context of the ship building is a welcome move. Activity based costing, as the name suggests is especially concerned with the activities of the concern, rather than any other items of the concern.
In today’s environment of innovation and globalisation, where each and every organisation always strives to continue to tread on the path of continuously improving its products and setting a benchmark in its activities with the most efficient companies and product manufacturers in the world, a company cannot exists without performing activity based costing (Lewins and Nair., 2015). A company or any firm can have a proper grip upon the market, only if it properly accomplishes the task of improving its value chain activities at each and every stage of production and distribution. The value added at each of these specific stages is consequently compared with the costs related to the activities and on that particular basis all the imperative decisions are taken about reducing and abandoning all the superfluous activities or addition of the new activities.
In the context of Austal, the building of ships, plays the most important role in drawing the revenue for the entire company. As it is a manufacturing concern, the implementation of the structure of ABC in its daily production procedures would not be a very significant problem. Although being a new setup, initial problems would increase. The production setup of Austal’s ship building consists of the following departments:
The implementation of ABC costing would require the following steps, where at first a complete clarification of the purpose of allocation is needed, identification of the support as well as the operating cost department polls is the next step, next in line is the process of selecting any particular cost drivers for each support department pool which would be based on a causal relationship between all the ancillary and the major departments. After completion of the selection of the cost driver, a method should be selected for the purpose of allocating support department costs to all the primary departments of the concern. All these methods would be used in each of the above mentioned departments. In the fabrication department, the allocation of the costs of aluminium, mild steel and stainless fabrication. In the same way in the other departments, all the costs of ancillary workshops, ship repairing, ceiling installation, solar requirements, paints, coded pipe-welders, laser alignment, hydraulics, gearboxes along with air handling units. The allocation of the necessary indirect costs would be done with the help of the cost drivers, which would ultimately help in the implementation of the ABC.
The usage of Absorption costing method is one of the most proficient replacement of Activity based costing and in the case of Austal Ships, this is no exception. Absorption costing is an able cost accounting method for deciding the valuation of inventories. Absorption costing includes or as it is commonly known as ‘absorbs’ all the different costs of manufacturing and producing a product including both the fixed as well as the variable costs. This includes all the costs including direct material, expenses, labour, overheads etc. They are all incorporated in the pricing of the inventory. Absorption costing gives a much more inclusive and precise view on how much it really costs to produce an inventory of goods (Arthur, 2018). It helps the company or the concerned organisation by allocating all the direct costs of producing the product. Here, in this case, of absorption costing all of the built-up costs are absorbed by the number of units, which are produced by the industrial concern. In the case of Ship producing giant Austal, it is no different either. The concern would directly allocate all the direct costs including materials, labours and expenses to the building of ships, vessels, containers, commercial sea vehicles etc. Along with this, the major advantage which would be provided by absorption costing to Austal, is the fact that absorption costing would take into account all different direct costs of production of the ships, containers and sea vessels. This would help in making accurate costs.
Conclusion:
The most significant impartial mission and aim of preparing this report is the process of emphasising the relative significance of the process of activity based costing in the ship building concern of Austal Ships Limited. The project report has been able to make the reader understand about ABC costing, its importance, significance features and its process of implementation. The complete implementation process of ABC, has been done along with the suggestion of an important alternative to the process of ABC costing, which is the absorption costing. The intention of preparing this report has been to provide a perfect understanding of the Activity based costing and its usage in the arena of manufacturing, which has been successfully shown with the help of Austal Ships.
References:
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