The report is prepared for conducting the research on the topic “Activity Based Costing” by selecting two journal articles from the accounting and management accounting journals. It is suggested by recent literature in management accounting that there have been considerable changes in the environment in which management accounting is practiced. Such changes have been due to highly competitive environment, information technologies, new management strategies, customer services and new focus on quality.
The practice of management accounting has introduced new management and cost accounting systems such as activity based costing, customer costing, balanced scorecard and activity based management (Chak and Fung 2015). In developing countries, there is little research on the adoption of such advanced practices. It is suggested by the evidence that during the last decades, there have been changes in the management accounting.
Discussion:
Explanation of activity based costing:
Activity based costing (ABC) is the method of managerial accounting that helps in tracing the overhead cost to the activities and accordingly assigning them to objects (accaglobal.com 2018). Such costing method has the main focus on process of production or identification of activities that are used in processing a job. After then, grouping of such individual activities are done with similar process into a cost pool relating to single activity cost driver. Such method of costing is regarded as the most accurate way of assigning indirect cost and helps in overhead expenses allocation to products and jobs based on the amount of activities that are required to produce the product.
ABC is a methodology for allocation of overhead cost in a precise way that helps in reducing the overhead costs (Ax and Greve 2017). Such costing method establishes a causal link between the indirect costs and cost drivers which helps in stimulation of transparent, responsible and cost conscious drivers. Employees would be able to understand different cost categories that would help in analysis of activities adding value with the implementation of ABC. Such analysis helps in ascertaining activities that do not add value to the organization and hence should be eliminated. The calculation of integral cost of products can be done accurately with the implementation of such costing method (Makrygiannakis and Jack 2016).
An organization can derive various advantages using the system of activity based costing in terms of customer profitability, cost of distribution, production facility cost and activity cost. Overhead cost allocation to the cost objects deserving to be charged with cost of overhead enables mangers to see the activity drivers that should be reduced that would help in shrinking of overhead cost.
Explanation of article 1:
An activity-based costing approach for detecting inefficiencies of healthcare processes”
An article has been selected from accounting, auditing and accountability journal that reports on a field study of change in management accounting in the context of healthcare organizations of Italy. The article explores the change in management accounting indicating why innovative or new accounting practices have or not have been adopted in the organization. The objective of this research paper is to conduct the investigation on the integration of activity based costing into the pre existing accounting system for supporting the healthcare organizations for identification of inefficiencies relating to the reengineering innovation and diagnostic therapeutic pathways (Messner 2016).
Such analysis intends to play a critical role in implementation and designing of cost accounting systems. It has been outlined in the literature that there is an increased investment by healthcare organization in systems and sophisticated tool of cost accounting such an activity based costing. There is wide availability of information on growing importance of application of ABC in detecting cost associated with inefficient productive and organizational process. The objective of this research paper is to contribute the implementation and use of ABC technique in healthcare organizations and literature (Van der Stede 2015). Analysis of research presents the section on literature relating to the importance of ABC in healthcare organization and implementation of ABC in the healthcare process.
Research paper has explored the benefits arising from use of ABC system as a technique of costing in depth along with structured method producing valuable measurements concerning the performance of process. In the healthcare structures in the current scenario, there is no implementation of ABC system because it requires organization to overcome a set of organizational, culture and technical barriers (Cannavacciuolo et al. 2015). The case study is designed for exploring the usefulness of the application of ABC in terms of reengineering and process improvement. It has been found that the result of this particular research paper deals with the identification of the barriers in the application of such costing system and advantages to healthcare organization (McLean et al. 2015).
Two level of analysis has been performed by referring to the cost information usefulness obtained by ABC implementation. In the first level, DRG tariff and DTP cost have been compared that leads to identification of loss or profit. The information that has been obtained from the ABC approach application to the given case is indicative of the fact that efficiency of this specific DTP can be increased by exclusively focusing on critical activities and resources (Latan et al. 2018). Furthermore, it is indicated by the case study analysis that ABC technique helps in inferring measurement of cost associated with the each activity and thereby contributing to performance management process.
The resources and activities characterized by cost are highlighted by the activities of ABC that provides with a detailed picture of structure of costs to the managers. It is highlighted by the analysis of case study in this particular paper that managers can be guided in detecting the opportunities for improving the care process efficiency with the help of information of cost that is obtained by the application of ABC (Lavia and Hiebl 2014). Furthermore, the implementation phase of ABC points out the advantages and barriers that is characterized by the accounting system cost centre. However, it is not possible to generalize the barriers depending upon one case study.
Explanation of article 2:
Another article has been selected is about determining the impact of activity based costing performance of organization. It has been found that a mixed results on the success of ABC after conducting the empirical research. The process of change in management accounting system is understood by the using the contingency theory of framework and exploring the rationale for such change. It is indicated by the findings that there is considerable amount of change in the systems of management accounting of the international companies (Nitzl 2016).
The primary objective of this particular research paper is to make a contribution in understanding of the change in the system of management accounting. It is provided by the contingency theory why there is variation in the system of management accounting of different organization in different settings. The basis of contingency theory of management accounting is that there do not exist appropriate accounting system that is applicable to organization. It has been identified by the literature associated with the management accounting that one of the potential indicators of the change in the system of management accounting is advancement of technology (Fullerton et al. 2014).
The contingency theory has been utilized for the examination as a basis of theoretical study. The main objective of this study was to determine the organizational performance in terms of impact of ABC using a perspective of contingency. It is specified by the management accounting contingency theory that it is not possible to have equal application of one accounting control system to all organization. This is so because different operating environment is faced by each organization which is required to be evaluated carefully through the strategic planning process. The structure and strategy including the contingency theory must be fitted into the management and existing environment for improving the performance (Otley 2016).
A basic contingency model is presented for explaining the relationship to managerial accounting and structure of organization. It is indicated that the competitive strategy of an organization is influenced by both exogenous environmental variables and endogenous organizational variables. Furthermore, to achieve the desired performance in a strategic way, the managerial accounting practice and structure of organization will be dictated by competitive strategy.
Organization might be influenced by additional factors such as firm size, production type, product diversity and degree of centralization by additional factors. A link has been provided between the systems of management accounting such as ABC and performance of organization as evident from empirical research in the managerial accounting. A positive relationship has been found between the use of managerial accounting information and environmental uncertainty. The system of management accounting and control system is affected by the specification of strategic choice.
The research work outlines that the management is provided with detailed information for making decision in terms of elimination of waste, streamlining of the process and cost reduction. It is assumed by this costing system that there would be improvement in performance due to enhancement of such method. In addition to this, it is believed by the organizational leaders that there would be value creation by ABC and the detailed information would lead to improved performance and cost reduction.
It has been found that organizations adopting the ABC tend to outperform the non adopting organization (Sanford 2009). Profitability is positively impacted by the cost improvement from the implementation of ABC system. The basic contingency model is tested in the research paper for determining the ABC impact on performance of organization. Size and strategy of organization in addition to technology and environment are the most prevalent contingencies (Wouter and Kirchberger 2015). Furthermore, it has been examined that the cost management in organization is influenced by the competitive environment.
Such analysis has been examined by collection the sample and data and the researcher conducted an internet enquiry on the Yahoo and Google search engines. Such results lead to identification of consultant who works with the organizations employing ABC. The performance of organization due to the implementation of ABC is measured in terms of debt to equity management, asset turnover, return on assets, operating performance and earnings per share (Thomas 2016). For examining the relationship between performance measurement and independent variables that is regarded as an appropriate technique
One of the samples on in the research was evaluating the implementation of ABC system and impact on financial performance of BHP Billiton (Search.proquest.com 2018). It was found that the performance of organization is positively related to the implementation of ABC. In addition to this, if the organization has low cost strategy, it was ascertained that such costing method would help in generating higher performance. With a higher degree of international competition, the operating environment was found to be complex. For the decision making, research does not provide adequate information on the costing techniques.
The perception of users regarding ABC implementation was influenced by the mixed results generated from the research and thereby keeping the organization from abandoning the traditional system of costing. Furthermore, some of the barriers in the implementation of system of ABC include lack of resources, lack of commitment on part of management, clarity of objectives, lack of resources, difficulty in costly driver identification, training and non accounting ownership (Cooper et al. 2017).
It is provided by the result operating performance and return on investment is influenced by the significant variable that is size of organization. The research contributed to limited contingency research that was available on management accounting for improving performance of organization by evaluating implementation of ABC. Hypothesis testing indicated that higher asset turnover has been generated by the organization and lower earnings per share and market price (Yigitbasioglu 2016). However, there were no operating differences and strategy of BHP Billiton compared to any other organization that do not implement ABC method.
Explanation of similarities and differences between the findings of two articles:
The first article has been extracted from emerald publishing that intends to detect healthcare process efficiencies by the implementation of approach of activity based costing. This particular research paper outlines the role of management tool in supporting the decision making process in organization. A remarkable reference is made by study in raising the accounting system pivotal role in the organizational process of management (Shields 2015). Such paper intends in contributing to the literature on the implementation and use of ABC method in health care organization. Second research paper on other hand helps in determination of impact of ABC on the performance of organization by relying on the perspective of contingency theory (Search.proquest.com 2018).
Therefore, the first article relies on contingency theory framework as against second article relies on the cost accounting theory. The methodology of analysis in the first article is based on case study analysis compared to the second article that used a sample of listed organization for evaluating the linkage between ABC and organizational performance (Kihn and Ihantola 2015). Furthermore, second article made use of wide range of statistical tool such as regression analysis and several tests in the section of methodology.
Research findings useful for the management accounting professionals:
The results that are obtained by the application of ABC in healthcare organization highlights on the cost information that that would guide managers in detection of opportunities that would lead to improvement in the care process efficiency. In addition to this, findings generated from second research paper would help in strengthening the key concepts which the scholars of accounting management propose. It is indicated by the case study that reorganizational actions requires to take into account some of the organizational aspect that particularly focuses on the cost information on resources and activities.
In addition to this, some of the critical areas have been detected by the accounting methodology presented in the given research paper where linkage is created between processes and cost and seek managers intervention. In order to manage the productive process in an effective way, the research paper helps in contributing to provide evidence to translation of theory of cost accounting into useful models (Järvenpää and Länsiluoto 2016).
In addition to this, the findings that have been generated from the analysis of the second research paper on determining the impact of ABC on performance of organization are likely to continue debate where such costing method implementation leads to improvement in organization performance. Furthermore, such evaluation also contributes to limited contingency research available on the management accounting. The study introduces culture of organization for identifying the objectives and research in generating public information (Andersén and Samuelsson 2016).
Conclusion:
The report is prepared for evaluating the case presented in the articles that have been extracted from accounting, management and auditing journals. It can be seen from the analysis of above articles determining the impact of ABC on performance of organization and detection of inefficiencies in the healthcare process by using the approach of ABC. Mixed results have been yielded when determining the impact of implementation of ABC on the organizational performance. Analysis of the second article depicts that implementation of ABC helps in identification of difference between radical and incremental reengineering innovations. Implementation of ABC would enable managers to focus on activities and resources that are cost consuming. Therefore, it can be inferred from the analysis that there is a considerable difference between the two research papers.
References list:
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